Fuel subsidy misses the point

The government has announced a Rs75 billion fuel subsidy for 2/3-wheelers and small cars. The subsidy will last for three months and aims to provide relief to users. However, critics argue that the subsidy may be more of a political move than a genuine attempt to help. While the government may have good intentions, a proven failed method is being used once again.

The relief offered is minimal and may be criticized more than it helps. The subsidy should have been implemented more effectively. Recent hikes in petrol prices have reached 44-50% over the past year, and the Rs2,000 per month relief for 2/3-wheelers and Rs3,000 per month for small cars may not be sufficient. There may be flaws in the mechanism, leading to inefficiencies and high leakages.

A better approach would have been direct cash transfers to those in need, as the government has done before. The poorest, who make up roughly one-third of the population, cannot afford bikes and receive no relief. High petroleum prices impact inflation both directly and indirectly. The price increase is most severe for HSD, which receives no relief, and has broader effects through higher transportation costs and higher food prices, which burden the poor the most.

Many 2/3-wheeler owners may also miss out on the benefit due to limitations in the subsidy or the mechanism's shortcomings. If the government wants to alleviate the pain for lower-middle-class and other consumers, it should have reduced the levy target by Rs75 billion. The petroleum levy (PL) is Rs80/litre, and the government could lower it by Rs16/litre for three months across the board.

This could provide broader inflation relief, as the IMf would likely not object to this measure. By using Rs75 billion to lower the PL, the government could achieve more. Non-tax revenues are far above budget, and the SBP has transferred Rs500 billion more than the budgeted amount. This gives room for a lower PL without affecting the bottom line.

Additionally, the FBR tax performance is meeting targets. The government should utilize these resources to lower the PL while international petroleum prices remain high. Direct cash transfers to the most vulnerable and lowering prices for everyone could help mitigate the direct and indirect impact on household expenditure. However, these measures may not have the same political appeal as the targeted subsidy, which may have been the primary motive behind this scheme.

Critics comparing the subsidy to previous schemes like Sasti Roti, Yellow Cab, and Laptop are likely correct, as political motives played a significant role in this case.