Diesel and urea price hike to hit farmers hard

Bangladesh's agriculture sector has been playing an important role in reducing rural unemployment ensuring food security, and contributing to GDP. The 2016-17 Labour Force Survey shows that 52 per cent of the employed population (aged 15 or older) in rural areas are engaged in this sector. Moreover, Bangladesh is nearly self-sufficient in food production. Thus, any policy measure related to the agriculture sector is likely to affect food security, contribution to GDP, and rural employment. Recently the government has increased the prices of diesel and urea. What are the potential impacts of this policy?

The price of urea per kilogram has been increased from BDT 16 to BDT 22 (37.5 per cent increase). The government has reasoned that farmers have the tendency to apply urea excessively. The price hike may decrease the use of urea. But if the change in the use of urea results in a less than proportionate change in the price, the costs of production will increase. The policy measure thus may increase the prices of agricultural products either through cost increase or production decrease or both. The diesel price hike may also have similar effects. Price hikes in agricultural products may slow down poverty reduction and recovery of the economy from the COVID-19 effects. If international prices of agricultural products are not higher than domestic prices and the government imports enough of the products, the price hike of urea may not have any effect on domestic prices of these products, and farm profits may be lower. Some farmers may switch from rice to non-rice crops that require less fertiliser. A reduction in rice production has severe implications for food security as rice is the staple food of Bangladesh. Moreover, an increase in the import of agricultural products will affect the balance of trade which is currently negative.

Another reason for the urea price increase is that the import price has increased dramatically. It is understandable that the government is providing a huge amount of subsidy to deliver fertilisser to the farmers at affordable prices. But we need to consider the real benefits of the subsidies. Subsidies increase domestic production, thereby lowing food prices. Subsidies to the agriculture sector may also contribute to reducing income inequality through increasing profits of farmers many of whom are in the lower income group. Further, subsidies to the agriculture sector may increase cropping intensity as well as decrease fallow land, thereby increasing employment in this sector. It needs to be mentioned here that according to the BBS (Bangladesh Bureau of Statistics) data, the amount of fallow land was about 5 per cent of the total net cropped area in 2019-2020.

According to the Finance Minister's budget speech 2022-23, the amount of subsidy for fertiliser was BDT 12,000 crore for the last fiscal year (2021-22). How large is the amount of the subsidy? According to BBS data, the crop and horticulture sector GDP at the current price was Tk. 211,886 crore (provisional) in 2021-22. Hence, the total amount of subsidy is 5.7 per cent of the crop and horticulture sector GDP. The amount was 2.02 per cent of the total budget (note that the revised expenditure for the fiscal year 2021-2022 was set at BDT 5,93,500 crore). In India, fertiliser subsidy was 3.7 per cent of the total budget for the fiscal year 2021-22. This suggests that to compete with the neighbouring countries, Bangladesh should increase subsidies to the agriculture sector.

What policy options does the government have to mitigate the possible effects of diesel and fertiliser price increases? The government may extend agriculture credits at a low rate of interest so that the small and marginal farmers do not resort to loans with high rates of interest from informal sources such as moneylenders. This policy may reduce the costs of production, thereby reducing food prices. Moreover, increased access to credits by small and marginal farmers may reduce harvest time sale of their products when prices are generally lower.

The government may need to increase rice procurement prices. This is likely to address the negative effects of fertiliser and diesel price increases on farmers. Recently, the government has raised the procurement price of aman rice to Tk. 42 per KG. This is a good initiative but this price is still lower than the current market price (retail). The coverage of open market sales (OMS) should be expanded. In a survey conducted in May 2022 by the Power and Participation Research Centre (PPRC) and the BRAC Institute of Governance and Development (BIGD), respondents felt that the amount of food and the number of selling points of the TCB must be increased.

Narayan Das is Associate Professor, BRAC Institute of Governance and Development (BIGD), BRAC University