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Tariff differential subsidy (TDS) effects and welfare gains in Pakistan

Author

Listed:
  • Ghulam Samad

    (Central Asia Regional Economic Cooperation (CAREC), Institute)

  • Naseem Faraz

    (Pakistan Institute of Development Economics (PIDE))

  • Haroon S. Awan

    (Central Asia Regional Economic Cooperation (CAREC), Institute
    Planning Commission of Pakistan)

Abstract

The electricity sector in Pakistan is over-regulated and hugely subsidised, which leads to a distortion in the market-oriented framework. Trillions of rupees have been paid for the Tariff Differential Subsidy (TDS) that has resulted in continued rising circular debt. The evidence on the effects of TDS on macroeconomic and welfare gains has not been established yet. This study investigates the impact of the direct transfer mechanism of TDS on macroeconomic gains and social welfare. We use the Computable General Equilibrium (CGE) framework to assess the impacts. The scenario analysis drives us to the following findings: first, the TDS is an untargeted subsidy, and the removal of this subsidy reduces fiscal deficit and eases out financial hardships in the country. Second, rather than providing relief to the poor, the TDS largely benefits the urban rich segment. This analysis provides compelling evidence that the removal of subsides will not only enable policymakers to devise a long-term and sustainable solution for the distortion in the electricity market but will also help mitigate its negative economic implications.

Suggested Citation

  • Ghulam Samad & Naseem Faraz & Haroon S. Awan, 2022. "Tariff differential subsidy (TDS) effects and welfare gains in Pakistan," Indian Economic Review, Springer, vol. 57(2), pages 373-392, December.
    • Handle: RePEc:spr:inecre:v:57:y:2022:i:2:d:10.1007_s41775-022-00150-z
    DOI: 10.1007/s41775-022-00150-z
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Tariff differential subsidy; Targeted subsidy; Fiscal; Growth; Market;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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