Subsidising the poor still remains a dream

Untargeted subsidies reach those people who do not need them.

KARACHI: Subsidies are considered a form of government intervention in a free market mechanism to offset market imperfections through inducing high level of production or consumption. It also aims to ensure social equity through redistribution of income in society. In Pakistan, it seems that provision of subsidies in different sectors of the economy has had adverse implications.

The main objective behind subsidies is to minimise the effects of inflation. The government generally allocates a huge amount for subsidies which leads to widening of the gap between its income and expenditure, called the budget deficit in economic jargon.

Our economic history evidently proved that governments had always preferred the much convenient way of printing currency notes for bridging the fiscal gap in the past. Consequently, inflation surged whenever authorities took such steps. So, one can easily imagine that subsidies are a cause of inflation instead of reducing it.

In fiscal year 2011-12, the central and provincial governments spent Rs463.091 billion on subsidies, which were Rs378.879 billion more than the figure for 2010-11.

Punjab spent Rs6.725 billion, Sindh Rs1.002 billion and Khyber-Pakhtunkhwa Rs2 billion. The central government spent the major portion of subsidies at Rs453.337 billion, which mainly went to the power sector and commodity purchase.

However, the question of relief to the poor remains unanswered despite the huge spending on subsidies. So, what has been achieved at the cost of budget deficit and market inefficiency?

Much of the subsidies provided by the government are untargeted, which is the actual problem plaguing the subsidy programme and has kept away the objectives. The consequences of untargeted subsidies are very clear as they reach those people also who do not need the relief.

Secondly, the subsidies are always limited and with bigger size of the population its distribution per capita reduces the impact. In this regard, subsidies in the energy sector are a real example where government spends billions of rupees, but the consumer gets very little of the advantages.

However, not all is bad, there are some examples of targeted subsidies, which include the Benazir Income Support Programme (BISP), Pakistan Bait-ul- Mal and Zakat system, etc. But these targeted subsidies have become a victim of politics because of weak institutional and organisational capability of the distribution system.

BISP is no doubt is the first programme which has been designed on scientific lines. The government has announced an increase of 40% in the BISP budget to Rs70 billion for the upcoming fiscal year, beginning July. But the scheme has also come under criticism, with people arguing that the PPP-led government is distributing the money on the basis of political affiliation rather than considering poverty levels. Similar views are also heard about Zakat and Bait-ul-Mal programmes.

In order to achieve the objectives of subsidies, it is necessary to make them as transparent as possible, use the money for well-defined economic and social objectives instead of short-term political gains and provide the money to final goods and services with a view to maximising the impact on the target population at a minimum cost.

The writer hosts business talk shows on FM 101 and Radio Pakistan and is pursuing an M.Phil degree in Economics

Published in The Express Tribune, 25^th, 2012.