Lopsided benefit of subsidies

A new report titled "Inequality in South Asia" presented by Martin Rama, the World Bank's Chief Economist of South Asia Region, on the last day of Pakistan Institute of Development Economics (PIDE) conference in Islamabad on 4th December, 2014 has thrown a new light on the issue of subsidies and income inequality and could be considered almost alarming in the context of Pakistan's economy. Talking about the burning issue of electricity subsidy, the report concludes that subsidy provided by the government on the supply of electricity is skewed towards relatively better-off segments of society as the poorest 40 percent of households received less than 30 percent, while the richest 20 percent received close to 40 percent of total electricity subsidies. The distribution of benefits has improved after the October 2013 tariff increase but electricity subsidies still remain regressive in Pakistan. Certain other findings of the report were also disturbing. For instance, it was pointed out that the poor have been paying more taxes due to lower direct taxes and development spending per person in poor districts of Pakistan. A wide-range of tax exemptions and concessions have been creating inequality and even registered taxpayers fail to file their tax returns. Under stress, a large majority of households in the poorest quintile borrow money, reduce expenditures, switch to lower-quality food, or reduce the quantity of food they consume. 11.5 percent of the households even reported selling agricultural assets to cope with the shocks, a strategy that compromises their long-term ability to earn an income. In contrast, wealthiest groups are much less likely to use these mechanisms. Another observation of the report was that disasters affect rural population more than the urban population in Pakistan.
As for the South Asian region, most of the countries performed poorly in terms of opportunity, with access to basic services partial at best, and often dependent on circumstances such as gender, location or caste. On the other hand, there was substantial upward mobility in the biggest countries in the region, even among socially disadvantaged groups. Growth too had been effective at reducing poverty in South Asia, as it was earlier in East Asia.
We feel that the instant report, in a way, highlights the flawed fiscal policy followed in Pakistan and should be an eye opener for the relevant authorities of the country. Fiscal policy, by its very definition and scope, should, besides other objectives, tax the rich more than the poor and serve to transfer the resources from richer sections of society to the poorer segments of population. In Pakistan, however, the data compiled by the World Bank in respect of electricity subsidy tells a different story. One explanation of higher subsidy provided to the richest 20 percent of the population on electricity may be their higher consumption but still such a narrative of the situation is depressing. In order to remove such a distortion, government could charge the actual cost of the supply of electricity from the rich and provide more relief to the poor or divert the amount saved from subsidy to some other more productive uses. Surely, people living in very posh localities of the country can afford to pay the full cost of electricity. It is also very hard to believe that development spending per person is lower in poor districts of Pakistan. The continuity of such policies could only worsen regional disparities in the country and is highly frustrating for the citizens of underdeveloped regions in the country. How a person belonging to a poor district and visiting Lahore city would feel is not difficult to guess when his own district headquarters gives the look of a crumbling city. Rural population suffers more at the time of a disaster is another worrying news. It is not difficult to conclude that such an exploitative fiscal policy would damage trust between regions and may shake the very foundation for social cohesion. On a closer look, one could easily feel that most of the countries in the South Asia region have done much better than Pakistan.
It is not easy to totally discard the old anomalous system, which has long been nurtured and is now entrenched but a beginning could, of course, be made. Taking a cue from the World Bank report, government could engage some independent top notch economist to analyse the overall fiscal situation prevailing in the country with particular reference to incidence and benefits of taxation among various groups of society and make suggestions to ensure that subsidies are provided only to the targeted (poorer) sections. After the appearance of the World Bank report, it is essential for the government to confirm or reject its findings and propose remedial measures. Otherwise, the government may be considered to be insensitive, if not complicit, in this woeful practice.