Economic observers at large have lambasted the government’s move of slashing petroleum products’ prices by Rs10/ltr, as international crude oil prices wreak havoc. Comparisons are being drawn from the Musharraf era when the prices were capped as the government heavily subsidized petroleum products. There are others who are losing sleep over the revenue hole and the financing gap that the step is going to create.
First things first. Tinkering with taxes on petroleum strictly remains a revenue call and does not require sector specialization. Revenue calls in a democratic setup are supposed to be taken by the government. This is exactly what is happening here. There were times when taxes were stretched to the upper limit as ground realities allowed back then.
These are unprecedented times. Why would one expect business as usual in unprecedented times? What is the obsession with “passing through” the increase in prices to the end consumer or else you will be doomed? Mind you, there is still enough tax on petroleum products, if viewed holistically. The energy component of the price is being passed through even today.
Recall that the government had doubled the custom duty on petroleum products’’ imports from 5 percent to 10 percent. That account is believed to have yielded more than Rs100 billion in eight months of the fiscal year, more than double year-on-year. Similarly, there is 17 percent GST on crude oil at import stage that also feeds into the final consumer price – even though the final price breakup may show that as part of the “base price”. The GST and custom duty on petroleum products had yielded close to Rs290 billion for Jul-Jan FY22 – up by a massive 72 percent year-on-year.
There is no denying that near-zero GST and PL will make a sizeable dent to government’s revenue, but the hole is not as big as feared, given taxes and duties at the import stage. The overall tax collection by FBR has found to be higher than the target so far.
The government will not necessarily have to retort to “more central bank borrowing” to foot the bill.
And no, all inflation is no equal. While there will surely be consequences for letting revenues go, the direct inflationary consequence of a sizeable petroleum price hike will outweigh revenue loss. Prices in the distribution chain of wholesale and retail sectors do not tend to reverse in tandem with petroleum prices. There is every reason for the government to try and limit direct impact of inflation.
Furthermore, the comparison with the Musharraf-era subsidy on petrol is ill-founded. That came into effect from a low base and inflation was not that big a concern, and the amount in lieu of PDC was substantial with respect to the oil prices, unlike today.
This is a populist move motivated by dwindling political capital and rising political pressure. And there is nothing wrong in being populist for a political setup. It is time relief to masses in times of distress is stopped being looked down upon.
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