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Fighting inflation with subsidies?

The Rs10 billion subsidy to tackle the impact of food inflation is just a stopgap arrangement, and not a permanent or sane solution to the issue. The federal cabinet on Tuesday approved a wide-ranging package which will provide subsidised food items to the Utility Stores Corporation (USC), 50,000 tandoors and dhabas, and ration cards for deserving people. Under the new subsidy regime, a 20-kg bag of wheat flour will be sold for Rs800, sugar at Rs70 per kg, ghee at Rs175, pulses at Rs15 and rice at Rs20 per kg at utility stores. The big issue is that the operation of the USC is mostly urban based, allowing minimum benefits to rural residents. Also, the working of the USC is questionable. It needs transparency, efficient management and modern marketing. Also, these kinds of subsidies are announced in every Ramazan in the country where thousands of bazaars are launched but inflation remains unbeaten. Besides this, the government has been distributing huge amounts under the Benazir Income Support Programme. The cabinet learned that of the Rs190 billion allocated for the Ehsas Programme, Rs40 billion has been spent, while the remaining Rs150 billion will be spent within the next four months. Moreover, 100 more Lungar Khanas will open under Ehsas.
This subsidy package is for next five months, which means Rs2 billion a month will be spent on it. Not enough! Moreover, increase in gas and power tariffs is on the cards. Once notified, another wave of inflation will nullify the impact of program. It is time the government’s finance gurus manufactured permanent solutions to get rid of inflation. Subsidised bazaars are a popular measure to win public hearts. At some level, such measures expose weak government mechanism on price control. In broader terms, subsidies are offered to lower prices, help manufacturers maintain incomes and sustain services. To some extent, subsidies can be justified if they correct externalities or protect struggling or infant sectors. The present mechanism of subsidy, which is to benefit the poor segment of population, often remains short of targets. The best option for the government to support the targeted segment is to offer them direct income support. The only effective way is ensuring a price control mechanisms throughout the year. This only needs a plan, constructed in active consultation with stakeholders such as farmers, market players, and retailers, to save the government from announcing miscalculated relief packages.



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