Tuesday June 25, 2024

Borrowed benevolence

By Mansoor Ahmad
May 30, 2023

LAHORE: When distributing subsidies, our rulers act like kings who can reward anyone without justification. Those rewarded include not only the extreme poor but also well-established industries. This is despite the fact that all subsidies are provided through borrowing.

Let us look at the targeted subsidies that other countries provide. India provides targeted subsidies for cooking gas, kerosene, and fertilizer. These subsidies are targeted at low-income households to help them access basic necessities at affordable prices. The affluent segments have no access to these subsidies.

Brazil provides targeted subsidies for education and healthcare. The Bolsa Família program is an example of a targeted subsidy that provides cash transfers to low-income families to help them meet their basic needs. These subsidies improve the human resource of the country in the long run.

Mexico provides targeted subsidies for electricity, food, and healthcare. The Oportunidades program is an example of a targeted subsidy that provides cash transfers to low-income families to help them improve their living conditions.

In Pakistan, we provide power subsidies across the board based on the number of units consumed in a month. The subsidy is provided on single phase meters installed at any premises (small or large).

The low-end consumers do get the benefit of this subsidy, but larger residences get two to 20 single phase meters installed at their premises. They benefit from the huge subsidy by operating each single phase meter to the maximum consumption where subsidy is allowed. In fact, this way they get more subsidies than the poor. According to the World Bank, energy subsidies as a percent of GDP are the highest in Pakistan.

This means that the price increase in international markets potentially poses a tough fiscal challenge. Using data going back to 2000, it shows that in response to a 10-percent increase in global oil prices, consumer price (CPI) inflation increases by 0.3 percentage point in Pakistan.

Although the government provides cash under the Benazir Income Support Program (BISP) in Pakistan, the global donor agencies consider it as a targeted subsidy. The program provides cash transfers to eligible low-income households to help them meet their basic needs.

The eligibility criteria for the program are based on a poverty scorecard, which is used to identify households living below the poverty line. Therefore, the program is targeted towards those who are most in need of assistance and is designed to alleviate poverty and improve the social welfare of the country.

This subsidy comes in handy under current circumstances when inflation has broken all records and pushed millions into poverty. This support, though, has not made any dent in poverty or enriched our human capital.

Though subsidies to the sugar and textile sectors have been withdrawn for now, these two sectors have always managed to claim favors after a lapse of a year or two. This must be stopped through effective legislation. All our industries must operate on a level playing field to give a fair chance to the entrepreneurs.

It is regrettable that all government packages subsidize industries that undermine the competitive process. These subsidies interfere with market signals and lead to inefficient allocations as perceived prices deviate from cost-based prices. Subsidies provided by the state cover both the inefficiencies of the state and the entrepreneurs. These subsidies thus take away the incentive from the private sector to attain global level efficiencies.