Oil price slump means Asia can cut costly fuel subsidies

Friday, 14 November 2014 02:17 - - {{hitsCtrl.values.hits}}

LAUNCESTON, Australia (Reuters): The 25% drop in Brent crude so far this year is providing an unparalleled opportunity for Asian governments to scale back or end fuel subsidies. Some, like India and Malaysia, have already cut off or reduced support for gasoline and diesel, but the worst offender in the subsidy stakes, Indonesia, has yet to take the plunge. The arguments against fuel subsidies are sound. They place a huge burden on the finances of government budgets in developing countries, prevent spending on more worthwhile social infrastructure and distort price signals to the public. Subsidies are also ultimately an ineffective way to assist the poorest in society, with the bulk of the benefits flowing to the middle class, who can afford private cars and electricity. These arguments are well understood by everybody, except perhaps the general public in nations with hefty fuel subsidies. It’s a hard task for a politician to draw a direct link between people paying more for gasoline and the construction of a new school or hospital that will take several years. This may explain why the initial enthusiasm for subsidy reform shown by new Indonesian President Joko Widodo appears to have waned. Widodo said on 6 November he hadn’t yet decided on when to implement a fuel price hike, leading to speculation that his Government is waiting until expanded welfare programs for the poorest Indonesians take effect. The apparent delay in cutting subsidies comes after Widodo had indicated that fuel prices would be raised by around 50% this month, in an effort to cut about $13 billion from the $23 billion annual subsidy bill. Gasoline in Indonesia currently cost about 6,500 rupiah ($0.53) a litre and diesel about 5,500 rupiah. These will be raised by 3,000 rupiah each, an advisor to the Indonesian Government told Reuters last month. Even if the diesel price is raised to 9,500 rupiah a litre, at the equivalent of about $0.78 per unit it will still be among the cheapest in Asia. The price of diesel in New Delhi is currently around Rs. 53.35 ($0.87) a litre, and this is now a market-related figure after India did away with subsidies last month. In China, which doesn’t formally subsidise fuel prices but does control their level, diesel costs about $1.02 a litre. In comparison, the national average diesel price in Australia last week was A$1.507 ($1.31) a litre, an 18-month low. Australian prices include both an excise of A$0.38 a litre and a 10% sales tax. From subsidies to taxes What the above figures show is the vast differences in fuel prices that can show up amongst a subsidising country like Indonesia, non-subsidising but non-taxing countries like India and China, and a taxing country such as Australia. While consumers in a relatively wealthy country such as Australia are better equipped to deal with higher fuel prices, in theory they also benefit from the government’s ability to raise revenue in order to provide social and other services. This is the path that other Asian countries should be following, but it’s also one that requires political courage, often a commodity in short supply. Even in non-subsidising Australia, the federal government’s plan to re-introduce the indexation of the fuel excise to inflation brought about protests from consumer lobby groups, businesses and opposition parties, notwithstanding widespread acceptance of the need for the government to raise revenue. Malaysia’s plans to introduce a tiered fuel subsidy system based on income looks overly complex and is likely to produce a perverse incentive for people to stay in lower brackets. Once again, this appears to be a case of politicians trying to pander to the public rather than implement sound policies. The best way to assist the poor is to scrap fuel subsidies and use the money to boost targeted welfare payments, but this requires efficient and corruption-free bureaucracies, something that isn’t always a given. Nonetheless, the sharp fall in oil prices this year, which unlike that in the second half of 2008 isn’t the result of a global economic crisis, should be an opportunity to end the practice of fuel subsidies. For better-off countries, such as China, it may also present an opportunity for the government to introduce or increase taxes on fuel without causing pain to the public. Time for Asia’s political leaders to stand up and show courage.