kheru2006 (kheru2006) wrote,

Beware the negative impact of fuel price hike

THERE is no way we can greet a fuel price hike with a smile. So little of our lives is spared the painful impact of a rise in the prices of petrol and diesel.

A fuel hike is never just a fuel hike. Many of us immediately feel the pinch on our trips to the petrol station. But it is the indirect hit that hurts us the most. Inevitably, businessmen will impose their own price increases for the goods and services they offer, blaming this on higher fuel costs.

We cannot be happy about having to pay more for petrol and diesel, but we should at least understand why the Government is rolling back the fuel subsidy.

As explained by Prime Minister Datuk Seri Najib Tun Razak when announcing on Monday the 20 sen per litre increase for RON95 petrol and diesel, the move is one of the measures to rationalise subsidies so that the country’s fiscal deficit can be narrowed.

It is not hard to see why a persistent deficit is risky to an economy. It is akin to a household that keeps spending more than its income; the debts will mount and the capacity to repay will diminish day by day.

The Government expects to record a lower fiscal deficit of 4% of gross domestic product this year. This is targeted to fall further to 3% by 2015 and Malaysia aims to have a balanced budget by 2020.

Najib said that with the Government paying less fuel subsidy, it would save RM1.1bil between September and December this year and RM3.3bil annually.

Note that the phrase used is “to rationalise subsidies”, not to eliminate them.

The chief complaint about the fuel subsidy is that the net is cast too wide.

Big businesses and the wealthy benefit as well, and people tend to be wasteful in the consumption of fuel when not paying market prices. There is a similar misallocation in other energy and food subsidies.

Subsidies have to be better targeted so that only those who truly need financial help (the low-income and vulnerable groups) will get it. This is why the Government has begun a programme to rationalise subsidies.

The 1Malaysia People’s Aid or BR1M is an example of a new way of channelling government assistance. Najib said the quantum for BR1M would be increased in Budget 2014. This indicates that part of the savings from the cut in fuel subsidies will be shifted to more targeted subsidies.

The fuel hike is based on principles of sound economic stewardship. However, as always, we have to watch out for unintended consequences.

It is fair when businesses charge customers more to cover additional costs. What we can do without is the me-too rush to up prices – often disproportionately – as soon as there is a fuel hike as a convenient excuse. Such opportunism can push up the inflation rate and negate the Government’s plans.

It is equally important that the new subsidies are properly structured and implemented. Tight controls ought to be in place to ensure that only the deserving are recipients. At the same time, bureaucracy should not get in the way.

Despite their social and economic roles, subsidies can be problematic because they distort markets and are costly. But so can profiteering, corruption and inefficiency. No prizes for guessing which is the lesser evil.

The Star Online Says Columnists Home > Opinion > Columnists Published: Wednesday September 4, 2013 MYT 12:00:00 AM
Tags: fuel

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