Beneath the surface
The diesel-driven dilemma
"The low cost of irrigation in other countries is mostly due to subsidised supply of electricity (India) and the subsidised public sector investment in the construction and the operation and maintenance of large scale irrigation projects. In Indian Punjab electricity is provided free for tube well irrigation and the farmer is also provided free water from irrigation canals. In Bangladesh, the major source of irrigation is the privately owned shallow tube wells and power pumps mostly run by diesel. The diesel has now become a major agricultural input in the cultivation of boro rice and the cost of boro cultivation is very sensitive to the price of diesel "
The price of diesel has been raised recently. It is the second time -- during its tenure of twelve months or so -- that the present government resorted to a rise in fuel price. Generally (and historically too) two arguments are placed to justify the action. First, a lower price of diesel in Bangladesh encourages smuggling of the product to India where the diesel price is reported to be relatively high. Second, a rise in international price of diesel, unless covered by a rise in the domestic price, could cost the exchequer in terms of subsidy.
We would like to argue that none of the above mentioned premises seem to hold water in the context of Bangladesh. First, if relatively lower price of diesel in Bangladesh results in smuggling, then why is not kerosene oil being smuggled into Bangladesh in the face of relatively higher price in Bangladesh compared to India? Again, large scale smuggling of this sensitive item would necessitate large number of lorries and trucks to carry the product on the other side of the border. Is it possible to do the job in the presence of customs and security forces? If for argument's sake we suppose it to be what is in fact happening, then the whole gamut is a question of governance where the government should raise efficiency of the border security personnel rather than the price of diesel. Second, if a rise in the international price is the cause of the rise in the domestic price, then equally a fall in price should result in the same direction. Unfortunately, never in the past we witnessed a decline in domestic prices following a fall in the international market. In this context, the government should have considered the average movement of prices in the international market and then set the domestic price for a reasonable period of time.
We want to hypothesise that the recent rise in diesel price would reduce the competitiveness of Bangladesh agriculture (especially boro paddy) vis-a-vis India by raising the costs of production and reducing farmers' net profit.. Newspaper reports are already running galore on the adverse impacts of a hike in diesel price across the country specially on agriculture. Farmers have already been facing 30-40 per cent rise in irrigation costs on account of the recent rise in diesel price.
In this context, perhaps, the most pertinent is a paper by Dr Mahabub Hossain and Uttam Kumar Deb, presented in seminar organised by the Centre for Policy Dialogue (CPD) recently. The authors deliberated on the impact of trade liberalisation on Bangladesh agriculture, especially on crop production. According to the authors, the variable cost of production per unit of output is the lowest for Punjab in India followed by Vietnam and Thailand. And as we already know, the cost of boro cultivation is higher than aman due to its heavy reliance on inputs especially diesel and fertilizer. Of course, the cost of production compares favourably with the nearest neighbour West Bengal. From the point of view of measuring competitive edge in the international market, however, one needs to tally the tales in comparison with Punjab and Andhra Pradesh since most of the marketable surplus of rice is generated through these two states. Compared to Thailand -- the largest exporter in the international market -- the cost of production of boro in Bangladesh is 62 per cent higher and for wet season crops it is 18 per cent up.
The farm-gate price as well as the margin of the farmers (price over the variable cost) is reported to be substantially higher in Bangladesh than in, say, Thailand. The Bangladesh farm-gate price is 50 per cent higher than that of Thailand and Vietnam and 15-20 per cent higher than the Indian State of Punjab and Andhra Pradesh. Now this higher margin at farm-gate should not lead one to raise the fuel price because of a non-negative net profit. In Thailand, for example, the average size of holding is 5 ha. compared to 0.68 ha in Bangladesh. Thus, Thai farmers could keep prices low but,at the same time, keep family income up. On the other hand, a marginal fall in farmers' income in Bangladesh could make the whole family marginalised. This is where the argument for protecting farmers' margin firmly stand up. At the prevailing costs and returns scenario, Bangladesh would not be able to compete in the international market of rice. Whereas the so-called self-sufficiency in rice production and the consequent complacency of our policy makers continue to finger at that.
Why is unit cost of production so high in Bangladesh? We know it is partly due to the agro-ecological condition and the development of irrigation infrastructure that determine the suitability of land for growing particular crop. The other is adoption of modern technology and these two taken together, go to determine the level of crop yield. For rice yield, Bangladesh is not lagging behind others and there is substantial scope for raising the yield rate and thereby reducing the cost of production.
But the most important factor is the cost of the prices of inputs. The price of urea is about one-third lower in India. However, difference in prices in this respect would not make much a meaningful difference in cost of production since fertilizers account for only 15 per cent of the total variable costs. Again, higher labour costs could be the cause of increased cost of cultivation across countries. For example, the wage rate varies from $5.2 in Thailand to about $1.2 in Bangladesh. But that argument does not seem to hold good since farmers have been and are already resorting to mechanisation in the face of labour shortage.
What is then the villain of peace? It has been observed that the major contributing factor behind the high cost of rice cultivation in Bangladesh (particularly boro rice) is irrigation. Irrigation accounts for around one-third of the costs of rice cultivation compared to only 13 per cent in Punjab, eight per cent in Thailand and six per cent in Vietnam. Irrigation cost is $32/ha in India, $51/ha in Bangladesh, $18/ha in Thailand and $26/ha in Vietnam. "The low cost of irrigation in other countries is mostly due to subsidised supply of electricity (India) and the subsidised public sector investment in the construction and the operation and maintenance of large scale irrigation projects. In Indian Punjab electricity is provided free for tube well irrigation and the farmer is also provided free water from irrigation canals. In Bangladesh, the major source of irrigation is the privately owned shallow tube wells and power pumps mostly run by diesel. The diesel has now become a major agricultural input in the cultivation of boro rice and the cost of boro cultivation is very sensitive to the price of diesel " (Italics are mine).
It is in view of the above mentioned realities that the price of diesel should not have been raised. If the international market price is up, the price should remain as it is and the government should take back the bucks during a slump in the international market. That would leave the exchequer unaffected in terms of subsidy. Secondly, if the neighbouring country India could subsidise agricultural inputs and hence attain competitive edge, then Bangladesh government should explore alternatives to be on a level playing field. Otherwise, in future, we suppose, cheaper diesel will be smuggled out to swell Indian market -- as argued by policy makers -- and cheaper rice will be smuggled in to swell Bangladesh. The dilemma seems to be purely diesel driven where a rise in the price of diesel would deteriorate the disease.
Abdul Bayes is professor of economics, Jahangirnagar University
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