In the upcoming fiscal year 2018-19, the government is considering raising subsidies to Rs 189 billion from the current year’s budgeted total of Rs 138.8 billion rupees, which shows a raise of 36 percent.
Providing of this (subsidy) facility is common in the world and does in our country, but we still need the facility be comprehensive and advantageous as our past government repeatedly failed in fulfilling the actual needs of the masses while displeasing the common man on many instances. There are number of relief schemes in the past budgets and some extra government’s measures taken to support the people financially but are those commitments and developments are all satisfactorily, or remaining to raise eye brows over its incomplete liberation?
Subsidies must not be used for political purposes given that their cost to the economy is very much high. A careful examination of the proposed recipients of the additional subsidy for 2018-19 is required.
There are also reports that the subsidy for the energy sector is also proposed to be raised to Rs 189 billion (from the current year’s Rs 102 billion) of which Rs 115 billion would be allocated for tariff differential subsidy in contrast to the current year’s Rs 65 billion. This decision, if taken, would no doubt raise serious concerns about the government’s objective.
Subsidies will be on the list of almost every Pakistani that tells how the government can promote economic welfare. Consumers want the government to give subsidies on a wide range of products and services. Any move to remove or reduce subsidy is bitterly overemphasized in the mainstream media.
People’s like with subsidies is based on the welfare concept of state, which is endorsed by many experts of Pakistan. Subsidies can reduce poverty and inequality by granting subsidies. Along with tax rebates, subsidies have become an impressive political tool by which government tries to charm voters. In some cases, benefits of the subsidy are exclusively given to economic agents belonging to a particular political constituency.
Under the proposals it is believed that subsidies should be given on essential commodities. These commodities include wheat, electricity and fuel among others. Currently, the government is subsidizing these products through different schemes. For example, Pakistan has state-run utility stores. The electricity and gas units that we consume are also subsidized.
It is recommended that the government should avoid the practice of untargeted subsidies. The practice has mostly been stopped in the world. A comprehensive study must be conducted before subsidy is provided for any industry.
Untargeted relief
There are many examples of untargeted subsidy which includes the subsidy for Utility Stores Corporation from where purchases can be made by the poor. But the rich and even businesses are getting the facility like bakeries and restaurants have been known to pick up sugar at subsidized rates from the government’s Utility Stores.
In the past, the government has run programs like Sasti Roti. The Metro Bus service in major cities of Punjab is another example of a subsidized program. Such types of subsidies are untargeted subsidies. These directly contribute to increase in inequality. Even an individual who can easily afford market prices is also enjoying the benefits of cheap rates.
Under the Sasti Roti program of the Punjab government in 2008, the price of bread was restricted to Rs 2 per piece. All individuals were paying the same price whether those living below the poverty line or those having earnings well above that threshold.
Schemes are like a tax rebate for the high and middle-income individuals. There are a lot of such individuals in Pakistan who actually belong to these income classes. Since they spend more on subsidized products and services, their absolute advantages are far more than those who deserve lower rates.
Subsidized schemes tend to increase absolute inequality in the economy. Subsidized projects fall to financial difficulties quite often which place a serious burden on public expenditure. The Punjab government is still paying millions to cover the cost of loans acquired for financing these schemes. In order to make room for loan repayments, the government has to compromise spending on areas that can reduce inequality in the long run like education and health.
Subsidies lead to wastage of resources and are not limited to individual consumers alone. Different industries are also enjoying subsidies. It is believed that subsidized industrial inputs will encourage domestic industries to produce more and hence increase economic growth.Even after decades trillions of rupees in subsidies for major industries of Pakistan have failed to record continuous growth. Subsidized industrial inputs are to promote growth as poor economic decision-making on the part of economic agents cannot be sustained in the long run.
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Assistance for Pakistan railways
Reports indicate that Rs 30 billion would be earmarked for Pakistan Railways as subsidy. The department already suffered a loss of Rs 60 billion and in this regard, the Chief Justice of Pakistan took suo motu notice and ordered a complete audit of Pakistan Railways.
Railways on the other hand say it not only increased its operational revenue to Rs 50 billion. It spent Rs 1.3 billion on up gradation of more than 585 passenger coaches but also reduced total losses of Rs 32 billion.
Railways inherited in 2013 to Rs 27 billion by ensuring financial discipline and taking concrete steps. Data released to the National Assembly in May 2014 showed that Railways during 2008-13 incurred a total loss of Rs 125 billion, earned Rs 97.191 billion and had expenditures of Rs 222.752 billion.
Fertilizer manufacturers concern
Fertilizer manufacturers argued that the government had not disbursed Rs 13 billion to them for 2016-17. They revealed that the industry had also sold fertilizer to the farmers at the subsidized rate during the current fiscal year which amounted to Rs 12 billion.
According to the standard principle, taxes are higher on finished products and are lower on raw material. The case is reverse for the fertilizer industry, which has given birth to the refund problem. A representative body of fertilizer producers has conveyed its concerns that it would bring more hardship for the industry.
The government was considering revising the output tax to impose a flat 2 percent sales tax on all fertilizer products and withdraw the urea subsidy.
The government was criticized for giving fertilizer subsidy only to farmers within its own political constituencies.
Financial backing to cotton industry
The Punjab government has announced to provide subsidy of millions of rupees on approved varieties of cotton seed bag under the banner of Khadim-e-Punjab Kissan Package. Under this subsidy scheme registered farmers of Kissan package belonging to Multan, Khanewal, Lodhran, Vehari, Bahawalnagar, Bahawalpur, D. G. Khan, Layyah, Muzaffargarh and Rajanpur districts will get bags of approved varieties of cotton and after un-sealing the bag they will get a subsidy voucher of Rs 700 per cotton bag.
Subsidy will be provided on approved varieties of cotton i.e., IUB-2013, FH-142, FH- Lalazar and MNH-886. This subsidy voucher bag will be provided in the month of April 2018, which is recommended sowing season of cotton crop.
This initiative will prove a favor in central area of cotton production. Due to cultivation of approved varieties per acre yield of cotton will be increased.
This is first time in the history of the country that such a schemes has been arranged for cotton growers to get benefit them and provide them subsidy at their door steps.
Moreover, wheat is currently available at a subsidized rate in Pakistan. This encourages would-be millers to set up plants in order to book profits even if production capacity of the existing plants is sufficient to meet domestic demand.
The government also gives subsidies to exporters with the aim of increasing exports. The protection accorded by the subsidies to export industries has rendered them uncompetitive in comparison to other countries.
Whenever subsidies are removed, export industries fall in the face of international competition.
There are also other factors behind the low competitiveness of Pakistani export industries. The practice of not disbursing the due subsidy by the government further worsens the situation. The burden of clearing these subsidies is so much that the government finds it difficult to clear them on a regular basis.