EDITORIAL: The decision of the caretaker government to slash petrol price by 40 rupees per litre, high speed diesel’s by 15 rupees per litre, light diesel oil’s by 19.59 rupees per litre and kerosene oil’s by 22.43 rupee per litre would undoubtedly provide relief to the public by having a positive impact on the value of each rupee earned by a householder.
Be that as it may, this significant reduction in price includes the retention of the 60 rupee per litre petroleum levy on petrol, the maximum allowed as per legislation passed by parliament, while the levy on HSD has been raised by 5 rupees per litre – from 50 rupee to 55 rupees.
The decline in petrol price for the next fortnight may partly reflect a pass-through of the international price yet the same cannot be said about HSD mainly in use by farmers and public transporters; and partly the strengthening of the rupee against USD that has been ongoing due to a crackdown on speculators operating in the foreign exchange market.
The new prices of petroleum products may well raise their consumption that had been steadily declining due to rising inflation in the country- 31.4 percent in September, 4 percentage points higher than in August - with a consequent increase in revenue generation from this indirect tax whose incidence on the poor is greater than on the rich.
The budgeted amount from the petroleum levy is 869 billion rupees for the current year, a target that was steadily becoming more of a challenge with each passing month as prices of petroleum and products rose.
The major beneficiaries of this reduction in prices will largely be those with their own transport – the motorbike and the car owners whose transport costs would decline.
It is unfortunate that the petroleum levy impact on the disposable income of a motorbike owner would be the same as that of a car owner, be it an expensive or a second hand car, and this is precisely why domestic and international economists urge the government to implement reforms in the tax structure to ensure that the bulk of the revenue is from direct taxes or those with the ability to pay rather than indirect taxes.
Lower fuel costs should translate into lower public transport fares as well as transport of goods (including perishable items from farm to market and other non-perishable items); however, in the past, any reduction in fuel prices was rarely passed onto the general public by transporters.
This tendency for prices to exhibit a sticky downward trend is evident in other countries, including the West, as well; hence it is not a phenomenon unique to Pakistan.
There is little doubt that fares would reduce if a crackdown on public transporters is launched on the same scale as is being carried out on the smugglers and speculators in the foreign currency market; however, there is an element of long-term sustainability of this crackdown due to the large number of law enforcement officials required to implement it effectively.
It is relevant to note that concerns have begun to surface that the crackdown in the foreign exchange market is no longer reflecting a market-based rate as pledged to the International Monetary Fund in the ongoing programme but as a means to browbeat the players into a parity to reduce domestic inflation.
In this context, the government would be well advised to note that the crackdown was launched on 6 September and by the end of the month the rupee-dollar parity had declined by over 25 rupees to the dollar and yet the rate of inflation rose by 4 percentage points.
We have repeatedly emphasised that reforms must be the way forward – reforms in the tax structure, reforms in the energy sector and an improvement in governance that may be jumpstarted through crackdowns but it must be remembered that the outcome of crackdowns is short-lived because they are not sustainable in the long run while structural reforms are of a more long-term permanent nature.
Copyright Business Recorder, 2023
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