It is also puzzling that of the Rs100 billion subsidies announced in the budget speech of Mr Omar Ayub Khan, only Rs89 billion can be found listed in the federal budget 2007-2008.
According to the budget-in-brief for fiscal 2008, a Rs8.1 billion subsidy has been earmarked for food. Of this, Rs280 million is for utility stores while Rs7.8 billion is for other food relief measures, including wheat and sugar import and the sale of essential food commodities in FATA and Gilgit. The much-hyped relief through utility stores is a mere 3.4 per cent of food subsidies.
Moreover, subsidy through utility stores, targeted only for sale of `atta’ (except the Ramazan package of Rs80 million), remained at Rs72 million less than the target of Rs280 million. How much of this subsidy of merely Rs208 million provided relief to the 24 per cent of the population below poverty line through utility stores remains a big question mark.
Table 1 below provides some basic facts on food subsidies. It is based on five years’ average --- 6.2 per cent of the overall subsidies. During last three years (FY2005-2007), the average share of food subsidies declined to 4.6 per cent.
Table 1 provides a quick snapshot of either less-than or higher-than targeted spending on food subsidies during the last five years. Except for FY2006 when the subsidies were Rs137 million higher, actual subsidies generally remained short of the target. Food inflation remained high and well above six per cent except for the FY2003.
If the difference between the target and the actual subsidy with food inflation is linked, it gives some interesting insights. First, compare the FY2003 and FY2004. When the shortfall in the target increases from Rs41 million to Rs200 million, food inflation rises from 2.8 per cent to six per cent.
In the similar manner, compare FY2005 and FY2006. From a shortfall of Rs23 million in FY2005, when spending on subsidies in the next fiscal overshoots the target by Rs137 million, food inflation declines significantly from 12.5 to 6.9 per cent. And again, when the government spends less than targeted amount in FY2007, food inflation increases again.
This analysis reveals that there can be some correlation between the subsidy target achievement and inflation. Although it is very difficult to establish this point without sophisticated econometric analysis, it provides a possible direction of co-movement. Table 1:
The second significant recipient of the federal government subsidies is the power sector in general, and Wapda and the KESC in particular. Each year, subsidies worth billions of rupees are provided to these two organisations. The power subsidies to these two companies are mainly on account of paying off their arrears, adjusting tariff differentials, absorbing cash shortfalls and GST as well as ad hoc subsidies. Table 2 shows their shares in overall subsidies.
On the average, these two utilities consume around 65 per cent of the overall subsidy each year. In spite of huge subsidies, electricity tariffs are still high as variable power charges average around Rs4.14 per kilowatt hour for residential consumers, around Rs6.56 for commercial consumers, and around Rs5 for industrial and bulk consumers. These variable prices are in addition to the fixed charges.
Wapda receives billions of rupees out of the federal development funds for various development projects related to dams, tube-wells, rural electrification and other relevant activities. These development funds are about 15.5 per cent of overall development budget of Rs543 billion in FY2008; a share higher than any other single ministry or division.
While the importance of these development projects cannot be denied, enjoying highest shares in both the federal subsides as well as development expenditure means that there should be minimal electricity charges as well as no load shedding, which is obviously not the case.
Another critical aspect is the subsidy provided to the KESC. In June 2005, just before its privatisation in November, subsidies were estimated to be around Rs9.6 billion. Privatisation failed to deliver efficient power supply, but subsidies to KESC kept climbing up. At the end of FY2007, KESC enjoyed subsidies worth Rs17.6 billion. A hefty Rs19.6 billion subsidy is earmarked for it in FY2008 as well. Table 2:
The food subsidies in FY2007 were short of their budgetary allocations. The subsidies to Wapda and the KESC have also decreased from 63 per cent of overall budgeted subsidies to 55.9 per cent as per revised estimates. The increase in overall subsidies from Rs89 billion budget estimates to Rs108 billion revised estimates is mainly due to the higher than targeted subsidies to oil refineries and oil marketing companies.
The revenue from petroleum development levy (PDL) is used to subsidise kerosene, diesel and light diesel oil. Refineries and oil marketing companies receive these subsidies as price differential claims due to rise in international oil prices. As a result, subsidies to these oil companies and refineries have increased to Rs25 billion in June 2007 as against the targeted Rs10 billion. Moreover, the government has provided Rs9.6 billion subsidy to textile sector for research and development support during the FY2007.
Food is not the only area that the government is supposed to provide relief to the poor consumers. However providing relief through food subsidies is not the panacea. Price hike, especially of food items, occurs mainly because of administrative or supply loopholes including excess profiting and hoarding which cannot be controlled by fiscal measures. Provision of subsidies without tightening up administrative control gives a wrong signal to hoarders and profiteers.
Continuous heavy subsidies provided to organisations such as Wapda and the KESC make them inefficient. Performance of these bodies is needed to be improved to reduce their subsidies.
The federal subsidies seem to have a very limited role to play in pro-poor welfare. The price fluctuations are purely a market phenomenon. There are some price-affecting endogenous factors for which governments can be blamed including rent-seeking, hoarding and profiteering.
The writer is an economist at the Social Policy and Development Centre.