An Econometric Estimation of Fertiliser Demand in Pakistan

Abstract

Since 1986/87 the government of Pakistan has been reducing subsidy on fertilisers. This reduction of subsidy resulted in more than doubling of the fertiliser prices in just eight years. The main objective of the present study was to assess the impacts of this reduced fertiliser subsidy on fertiliser demand by the farmers. To pursue this objective, demand functions for nitrogenous, phosphatic, potash and aggregate fertiliser were developed. These demand functions were dynamic demand models which incorporated partial adjustment processes. The variables of the model included one-year lagged consumption of fertiliser nutrients, own-price of the nutrient, price of farm outputs, credit availability for the purchase of fertiliser, acreage under major crops and a time trend. Time series data on these variables were collected from Economic survey of Pakistan (1996-97), Agricultural Statistics of Pakistan (1995-96) and Pakistan Fertiliser Related Statistics (1993). It was found that the time trend and acreage under major crops appeared to be the most significant determinants of fertiliser demand in Pakistan. That is, demand for all the fertiliser nutrients has increased over time and with increases in the acreage under major crops. The coefficient of own-price of nutrients was negative and statistically significant (at 5% level) for nitrogen and composite fertiliser. However, it was negative and statistically non-significant (at 5% level) for phosphate and potash fertiliser. Demand for all the fertiliser nutrients was price inelastic in both the short-run and the long-run. Demand for all the fertiliser nutrients was highly elastic with respect to the acreage under major crops. From the results of the study, it was concluded that subsidy from fertilisers can be reduced/removed without decreasing their use significantly. Intensification of extension services and provision of credit for the purchase of fertilisers are likely to increase the fertiliser use level.