Jute, the golden fibre, is one of the most important export item of Bangladesh and it generates a significant sum of foreign exchange. In order to promote this sector, Bangladesh government provides cash incentive to jute yarn and jute goods exporters, which is 7.5 per cent and 10 per cent of net FoB (freight on board) value respectively. Does subsidy really promote this sector?
There is no doubt that the subsidy helped the jute sector to regain its past glory as export of the 'golden fibre' touched a billion-dollar mark in recent years. But it is alarming that some jute manufacturers are becoming dependent on the cash subsidy for their profit. Large manufacturers export jute at a low price, sometimes below the production cost, in order to capture market. As a result, small and medium jute manufacturers are losing market and facing difficulty to keep their operation ongoing. Subsequently, large manufacturers export huge volume and get enough cash subsidy. Thus, small and medium manufacturers are driven out of the market. In this way, subsidy creates monopoly.
Subsidy also causes pricing problem. Suppose, production cost of per metric ton of jute goods is 800 USD and profit (in economic term, entrepreneurship cost) is 200 USD, resulting in a price (total cost in economic term) of 1000 USD. When large manufacturers export at a price below 1000 USD, the gap is covered by cash subsidy. This means cash subsidy has become a part of the price. So, amount of subsidy determines the price whereas it should have been determined by market demand and supply.
One probable solution of this is to provide cash subsidy for new market exploration. In this policy, exporters will get cash subsidy if they export jute to any new market. If this happens, small and medium companies will get a broader scope to do business. Export price floor may be set by the government to prevent price-cut competition and to help price mechanism work. In a nutshell, subsidy should be provided in such a way that it does not make any distortion in the market.
The writer is Audit Assistant, Hoda Vasi Chowdhury & Co.
mosarraf33@gmail.com
Subsidy should not create distortion
Md. Mosarraf Hossain | Published: June 06, 2014 00:00:00 | Updated: November 30, 2026 06:01:00
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