Subsidies - an exercise in futility

A lot has been said about the power sector woes in Pakistan: And a glance at the countrys annual subsidies only elevates these concerns even more. In laymens terms, subsidies are payments doled out by governments to support a particular industry in its economy, or manage the price of commodities, particularly agricultural ones. It is an unrecovered cost incurred by the government mainly for the benefit of the disadvantaged classes. Like any developing nation with a sizeable proportion of the population that can be labelled as disadvantaged, subsidies are no alien terms for the budget documents of Pakistan. What is worrisome? It is, however, the mismanagement of these subsidies and a less-than-optimal allocation of the same to various areas. The central theme of the subsidies that have been doled over the past few years has been how the actual outlay always exceeds the budgeted by a magnanimous amount. On an average since FY08, the actual outlay for subsidies has been about 130 percent over and above the amount actually budgeted for that fiscal year. The only exception has been FY09 when actually given out subsidies were lower than what was budgeted for that year (see chart). A major chunk of the total subsidies every year is allocated for the power sector, the biggest beneficiaries of which are the richest 20 percent of the population according to the World Bank. With more than 90 percent of electricity consumption being subsidised, because richer households consume electricity more than what poorer households consume; a significant portion of these power subsidies accrue to the rich. "The richest 40 percent of households-who arguably does not need subsidy support-still receives over 50 percent of the subsidies," said a World Bank report published on electricity subsidies last year. Ironically, despite the markedly huge incidence of power subsidies, the circular debt crisis and inefficiencies in the sector continue. Quite obviously, the government has not been able to find a viable solution to overcome the problem over the years and mismanagement still prevails. This makes the case for agricultural subsidies even stronger as they are believed to help out the poor farmers. However, the subsidies given out for agriculture are doled out to organisations such as the PASSCO (Pakistan Agriculture Storage and Services Corporation) - a state-owned entity often criticised for loss-making - and the Trading Corporation of Pakistan (TCP). The feasibility of rolling out agricultural subsidies in this manner is questionable, as, first, crop procurement at the local level and import of commodities run the risk of creating distortions in commodity markets, with prices often jacked up to inflationary levels. Needless to say, this beats the purpose of establishing food security for the less fortunate. Secondly, most of the benefit of these subsidies accrues to the middlemen and large farmers rather than the small farmers; thanks to opportunities of hoarding and creating artificial shortages by the former. The case of subsidies for fertilisers is similar as it is believed that giving these out to fertiliser manufacturers rather than the farmers directly results in the benefit diluting by the time it reaches the small farmer. Fiscally, subsidies are back-breaking for the country. During the last four fiscal years, around Rs.1 trillion has been paid out in subsidies, mostly to loss-making SOEs. The lessons to take home include a more targeted form of subsidies for the poor, such as the Benazir Income Support Programme, and good governance in public entities, plausibly with the help of the private sector to ensure they operate more efficiently. Will these lessons be reflected in the FY13 budget? Going by media reports that the FY12 subsidy target (Rs.166 billion) has already exceeded Rs.350 billion, perhaps it will be long before the policymakers actually apply these lessons.