Fuel subsidy misses the point

The government has announced a Rs75 billion subsidy on fuel consumption for 2/3-wheelers and small-car users. The scheme will run for three months, with the objective of providing some relief to bike and car users. Critics, however, are of the view that it may end up being more of a political stunt. The government might have good intentions, but it is using a proven failed method and may face more criticism than gain political dividends. Given the hike in prices, the relief is, at the end of the day, little more than a gesture. It should have done it in a better way. Petroleum prices have risen by 44-50 percent over the last twelve months, and the relief of Rs2, 000 per month for 20 litres of petrol for 2/3-wheelers and Rs3, 000 per month for 30 litres of petrol for small cars might not be enough. Plus, the mechanism may have several flaws, and there could be significant inefficiencies in execution. A better way could have been to provide direct cash transfers to those deserving, as the government has done multiple times before. There is better precedent, but the government is still opting for an inefficient method where leakages could be high and efficacy low. Another important question is the impact of higher petroleum prices and who deserves the limited subsidy. Well, the poorest, roughly one-third of the population, cannot even afford a bike, and there is no relief for them. Petroleum prices have both direct and indirect impacts on inflation. The price increase is higher in HSD, where there is no relief, and its indirect impact through higher transportation fares and its effect on the prices of all items, especially food, is pinching the poor the hardest. They would not get any cushion. Plus, it is likely that many 2/3-wheeler owners may be deprived of the benefit due to the limited subsidy or shortcomings in the mechanism. And if the government wants to ease the pain for the lower-middle class and other consumers, it should have reduced the levy target by Rs75 billion. Petroleum levy (PL) is Rs80/litre, while average monthly consumption of petrol and diesel combined is around 1. 5 billion litres. The government can lower the PL by Rs16/litre for three months across the board by the same amount. This could have been a better measure. And the IMF may not have any objection to it, as the PL target is not binary, while the primary fiscal balance is. Thus, the government could have used Rs75 billion to reduce the levy and provide broader inflation relief. Given the better fiscal position, the government could have done more. Non-tax revenues are so far above budget, as the SBP has transferred Rs500 billion more than the budgeted amount. That gives some room for the PL to be lower without disturbing the bottom line. Plus, FBR tax performance is meeting targets. The government should use these cushions to lower the PL while international petroleum prices remain high. Thus, a better mechanism could have been to provide direct cash transfers to the most vulnerable while also lowering prices for everyone to dilute the direct and indirect impact on household expenditure. However, neither of these measures could have been used as effectively for political mileage as a subsidy targeted at specific consumer segments. Hence, critics comparing the scheme to Sasti Roti, Yellow Cab and Laptop schemes are perhaps right, as in these cases political motives dominated.

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