The rationale for subsidies

ARTICLE: Prime Minister Imran Khan has directed his adviser on finance Dr Hafeez Shaikh to form a "special cell" to review subsidies of billions of rupees being extended to different sectors and ensure their effective utilisation to provide maximum relief to people. "A special cell should be formed to review subsidies in all sectors for their better utilisation and benefits to maximum number of people," the prime minister said while presiding over a meeting of a think tank on country's economic affairs.

Not only is prime minister's decision to determine the merit, rationale and benefit of billions of rupees of subsidies granted to a number of sectors is a welcome step, it is also an unprecedented one. Since inception, the trend of extending subsidies to various sectors creeped into our national economy. Its rationale and merit were hardly ever questioned or challenged all these years. Subsidies have largely been granted : (1) by those in power to businesses owned by their fraternity - irrespective of the political divide and to select group of individuals and industries as favour for political gains and vested interest.

(2) To the sustain loss making public sector enterprises resulting in covering up and condoning their inefficiency, corrupt practices and poor governance.

Whereas, subsidies are usually meant to improve supply of essential goods and services enabling consumers to easily access cheaper products and commodities. This has seldom happened. On the contrary, however, the consumers experienced the arrogance of subsidy recipients in terms of product hoarding, high prices and strong-arm tactics to subjugate consumers to their dictates.

The recent exposure of wheat and sugar cartels of influential people, prospering at public expense, on both sides of the political divide is a glaring example of this practice. For decades both the segments have been facilitated with abundance of subsidies and protections with no benefit to the consumers - neither in terms of availability or prices. The other example is the nation's crumbling power sector where inefficiencies, incompetence, power theft, corrupt practices and all ills are covered by subsidies and again with no benefit to consumers who continue to suffer for years from unavailability and non-affordability of power. This year alone, a Rs 251 billion subsidy has been provided to the energy sector.

Then on a larger scale are mega public sector enterprises like PIA, Pakistan Steel Mill and Railways whose inefficiency, incompetence, poor governance and other ills are covered up through subsidies. Again of no benefit to consumers.

Subsidies have favoured select groups and organisations at the cost of public interest. That institutionalized subsidies have created pressure groups with political influence that subjugate political leadership and make their influence difficult to be ignored or challenged is a fact. It becomes very difficult politically to withdraw subsidies. To get elected, politicians need to commit their support to maintain subsidies, even though there is a net welfare loss. This is one reason why government after government never challenged the culture of subsidies.

If the government of PM Imran Khan wants to make a meaningful difference in favour of public the culture of subsidies should be done away with. This system in Pakistan's landscape has all the disadvantages and no justification unless it is geared towards target group that are below the poverty line.

(The writer is former President, Overseas Investors Chambers of Commerce and Industry)

Copyright Business Recorder, 2020