Cross subsidy, cross purposes

Dodgy in theory, dodgier in practice

The recent announcement by the Minister of State for Petroleum, Musadik Masood Malik, to increase petrol prices for the wealthy and reduce them for low-income individuals has drawn much criticism. While the idea of cross-subsidization may seem noble, the government’s scheme raises more questions than it answers.

Firstly, the government has been hesitant to use the word “subsidy” to describe this scheme, presumably to distance it from the previous petrol subsidy provided by the government. This raises questions about whether the International Monetary Fund (IMF) will approve of this cross-subsidy or seek to scrap it. The government must clarify its position on this matter.

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Secondly, while a report by Profit shows that the scheme may work under specific circumstances, it assumes constant consumption patterns, which is a flawed assumption. The consumption patterns may change once the subsidy is implemented, leading to the entire scheme falling apart. The government must conduct a thorough study of consumption patterns to ensure the scheme’s success.

Thirdly, the scheme’s effectiveness is dependent on the accuracy of the 35:65 split of consumption between two and three-wheelers and four-wheelers. This split does not account for 800cc four-wheelers and light four-wheel commercial vehicles, which are also beneficiaries of the subsidy. The government needs to provide a clear breakdown of sales within the transport sector based on the type of vehicles to ensure the scheme’s effectiveness.

Fourth, the government’s scheme raises concerns about whether the wealthy will be willing to pay the extra Rs100 per litre of petrol. Though that seems like a reasonable assumption, more or less, but if they choose not to do so, the government’s plan will fail. It could lead to a loss of revenue for the government, which could impact the subsidy’s availability to low-income individuals.

And finally, of course, is the issue of pilferages and graft. Setting different prices for the same commodity will immediately create an incentive for black marketeering. Our state just doesn’t possess the tools required for effective control.

In conclusion, while the idea of cross-subsidization may seem like a noble one, the government’s scheme raises more questions than it answers. The government must conduct a thorough study of consumption patterns, provide a clear breakdown of sales based on vehicle type, and clarify its position with the IMF. Until then, the scheme’s effectiveness remains in doubt.

The Editorial Department of Pakistan Today can be contacted at: [email protected].


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