Petrol and excuses

15 Aug 2020

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The writer is an economist, and a research fellow at the Pakistan Institute of Development Economics.
The writer is an economist, and a research fellow at the Pakistan Institute of Development Economics.

PAKISTAN’S existential lexicon contains a few unchanging constants like India, Islam and political uncertainty. A rather interesting case of another constant, the excuses surrounding petrol price increase, usually slips under the radar. It’s an interesting constant since it’s a healthy reflection of the intellectual deficit that pervades our governing classes. Hence, a closer look at the issue and a bit of analysis is warranted.

Before I proceed further, a slight digression is in the offing to comment on the social media trolls of all political parties. These armies of ‘bhaands’ (the Punjabi acronym for such individuals) are the first ones to jump to the defence of their parties while abusing their opponents. And none are more vociferous in their scale of attack, reach and depth than the PTI’s, who consider criticism nothing less than sacrilege.

It was the same group that jumped to their party’s defence with the latest increase in petrol prices. The excuses were the same as before, employed also by other parties when they were in power: it’s still ‘less’ than India and other countries, the increase came in the wake of an international increase in price, we’ve inherited a difficult situation so we have to make ‘difficult’ decisions, etc.

The overall cost to the people could be formidable, something that trolls and ministers rarely discuss.

But these excuses can be hard to justify. Let’s first do away with the arguments involving pricing comparisons with our national obsession: India. First of all, the movement of petrol prices in India or any other country is none of Pakistan’s concern, and neither should it be. We should be more concerned with what affects our living standards in our country.

Second, and importantly, such comparisons are meaningless without factoring in relative buying powers. So, for example, the obsession with India should also factor in its buying power (higher than Pakistan) while making comparisons. Simply put, even if there is a price increase in India and there is none in Pakistan, the commodity in question may still be cheap in India for its consumer given the relative buying power.

The excuse of price increase in the international market would hold more ground if the same were implemented in case of price decrease, and also explained in the background of taxes charged per litre of petrol. Prices of commodities like petrol never remain on an upward trajectory. In fact, in the last decade, they’ve hit rock bottom on two occasions: the great recession of 2008 and during the more recent coronavirus outbreak. I challenge anybody to produce evidence that the percentage fall in international prices in those instances was matched by a similar percentage fall in Pakistan. In fact, other instances of fall in international prices can also be compared. Ultimately, it will be concluded that the quickness and efficiency shown in increasing petrol prices (in consonance with international prices) is never matched while decreasing prices.

Why? It’s simple: petrol and other such items have been revenue spinners for successive governments of a badly governed country, where trillions of rupees have been dished out to special interests and lobbies in the form of poorly targeted subsidies and tax concessions. For Pakistani governments that have faced a difference of trillions of rupees between expenditure and income (the difference at present stands at more than Rs3tr), taxes such as ‘petroleum levy’ are akin to lifelines. What the bhaands and ministers will never tell you is that the petroleum levy is one of the highest in the world (if not the highest).

But why levy such high taxes on hydrocarbons like petrol? As an economist would tell you, these are highly inelastic to price changes in Pakistan, which in simple English means that no matter how much the prices increase, we are highly unlikely to observe any major reduction in their use! And that primarily owes to the fact that our economic mobility is largely dependent upon it. To earn, you have to move. To move, you need transport. Since there is but a semblance of efficient public transport in Pakistan (and the absence of transport running on alternative sources of energy), a large part of transport needed for economic mobility is private. And the transport system is largely dependent upon hydrocarbons like petrol. You can’t lessen your dependence on transport since it would decrease economic mobility, thereby decreasing the probability of earnings.

Couple this with the ugly, horizontal sprawls (especially in urban centres) and one should have no difficulty in arriving at the conclusion that our lives are ever more dependent on hydrocarbons like petrol. The designers of tax policies (the babus) are well aware of this fact, and hence these are easy avenues of extraction without much effect on demand (electricity is another such example, where furnace oil is used extensively for production).

The overall cost to the people could be formidable, something that trolls and ministers rarely discuss. Petrol prices have a very close association with inflationary forces in Pakistan. Even a slight increase can have a large impact (the opposite, though, may not hold). To put things in perspective, imagine the inflationary pressures released by a one-time, unprecedented increase of Rs25 per litre. Such inflationary episodes, coupled with economy-wide low productivity, lead to a reduction in the standard of living as higher prices bite into purchasing power.

Last, but not the least, taxes like petroleum levy are what are known are ‘indirect’ taxes, that tend to be ‘regressive’, meaning that their adverse impact is largely felt by tiers at the lower end of earnings (the poor and lower middle class).

In essence, price changes like that of petrol is not something to be trivialised by banking on flimsy excuses. It in fact covers an entire gamut of economic mobility and related issues. It’s a serious enough matter not to be left to trolls and ministers to justify.

So, my request to policymakers (present and future) would be: if you have to increase the petrol price, just increase the damn thing without relying on insipid excuses. Thank you.

The writer is an economist, and a research fellow at the Pakistan Institute of Development Economics.

Twitter:****@ShahidMohmand79

Published in Dawn, August 15th, 2020