Reimagining the petrol subsidy

The government has taken an initiative to provide a subsidy of Rs100 per liter on petrol to provide some relief to the low-income class in the prevailing economic situation. It plans to charge affluent consumers more to fund the subsidy.

Under this scheme, a two-tier pricing system will be opted. There is a monthly cap of 21 litres per month for two- or three-wheeler vehicles, and a cap of 30 litres per month for small cars with 800cc capacity or below. According to Petroleum Minister Musadik Malik, the scheme will cover around 20 million registered bikes and rickshaws and 1.36 million cars.

Although the government has planned a relief scheme to protect the vulnerable, it has to tackle multiple challenges. Two methods have been discussed so far to make the scheme work. First, the applicant will receive an OTP (one-time password) after getting registered through an SMS that needs to be shown and verified at fuel stations along with a CNIC. This can be a time-consuming task as it will result in increased queue timing at petrol pumps.

Second, people will get fuel cards to redeem their allotted fuel quota. Apart from this, the per-day limit to consume subsidize petrol is 2-3 litres for two- or three-wheelers and 5-7 liters for small automobile consumers to discourage the possible emergence of the black market.

It is also important to understand the mechanism of subsidized pricing. The petroleum minister says Ogra will determine two different prices for both high-income and low-income consumers. For example, at the current petrol price of Rs272 per litre, the low-income group will be charged Rs222 per litre and high-income consumers will be charged Rs322 per litre. So technically, it is a Rs50 subsidy per litre with a Rs100 difference for both classes – the rich and the poor. However, the complete burden will be borne by rich people, which may result in tax evasion and under declaration of assets.

Now the question is: what will happen when the consumption limit exceeds the limit of 21 litres for two- or three-wheelers and 30 litres for 800cc vehicles? Will they be charged the actual market price or the higher price set for rich consumers? Again, it is not clear.

It is important to note that a majority of 800cc and below vehicles are used as taxi and commercial vehicles, and their consumption is much higher than any normal family usage car. Every additional consumption above the limit will cost them the full price of Rs322 per litre. A small car on average consumes three tanks – 30-litre capacity – in a month. In this context, it will not only ruin the purpose of providing subsidies but also put an additional burden of Rs1,500 on the consumers.

Also, only 800cc cars and below are eligible for this scheme. What about the other middle-income households with a 1000cc car and a monthly income of Rs100,000? If we assume that these cars consume 100 litres per month on average, then neglecting the middle class will put an excessive burden of at least Rs5,000 per month. Apart from this, a majority of loader rickshaws are not registered at excise offices due to lack of certification from the concerned departments. More than 200,000 loader rickshaws are operating without registration in Punjab alone, and will ultimately be ignored from the benefits of this scheme.

This will not only affect their consumption behaviour affected by a reduction in disposable income due to inflation but also push a majority of them below the poverty line. Already 71 million people have been pushed below the poverty line due to devastating floods in June 2022.

The story does not end here. This scheme will also enhance inequality by making eligible a car owner with a 660cc engine worth Rs2.5 million and above and neglect the use of 1000cc cars with a market worth of Rs0.8 million. Also, it promotes regressive taxation by putting more stress on the poor and the middle class.

This subsidy seems inadequate for providing relief to the poor as it will further exacerbate the existing crucial situation in the country. Pakistan is already facing the worst socio-economic crisis of all time and the crises like flash floods and conflicts are adding fuel to the fire. Inflation in the country touched the record-high level – 31.5 per cent on year-on-year basis – during the month of February 2023, with food inflation recorded around 41.9 per cent. During such times, when the country is already facing multiple issues, putting pressure on low- and middle-income groups may further worsen their purchasing power.

Additionally, the IMF seems unhappy with the announced scheme. At a time when the government is waiting for the staff-level agreement – already delayed by eight months – announcing a subsidy scheme without consulting with the IMF may further delay the deal, further affecting the economy. Pakistan’s foreign exchange reserves can barely support the essential imports of four weeks. As a result, the country is eagerly waiting for the release of $1.1 billion installments from the $6.5 billion bailout package agreed with the IMF in 2019.

Pakistan needs to rethink the policy as it can create more stress on consumers. The eligibility criteria should be based on the income level not on the vehicle category. The government needs to set a benchmark for the eligible community based on the prevailing market conditions.

Relief schemes like ‘sasti roti’ failed to achieve their objective in the past. We now need to focus more on long-term solutions, instead of short-term schemes. The tax system can be improved by increasing the tax net and implementing the progressive taxation system. Apart from announcing such schemes, the government should focus more on targeted subsidies in terms of cash transfers through mobile wallets and bank accounts.

The writer is a research associate at the Sustainable Development Policy Institute (SDPI), and the opinion reflects his own views. He can be contacted at: umar@sdpi.org