Indonesian Controversy on Reducing Petroleum Subsidy

In the last few weeks, there has been an intensive debate on reducing petroleum subsidy in Indonesia, pushing the gas price increase. The main reason is that world petroleum price has increased substantially in the last few months. If petroleum remains as the current price, the government spending for petroleum subsidy would be increased immensely, which may disrupt national budget condition, and do not have enough money to build new infrastructures and other public affairs. If we should give the subsidy to the people, it should be done in the right way. High subsidy on petroleum is considered not fair because the high proportion of petroleum consumption goes to rich people who motors and cars. Therefore, it may be wise to remove the subsidy, and use the money for the poor and other public affairs like health and education.

However, many people offer other strong arguments. Although removing subsidy looks good in light of economic efficiency, it may have detrimental multiplier effect to society. Petroleum is considered as strategic goods, meaning that the increase of its price will also force other goods prices to increase, especially for closely related goods. Certainly, it will create inflation and cause loss of consumer surplus or decrease people welfare. This will significantly affect the poor people. Although government promise to give short time cash relief to the poor people, it would not be effective not only because of inappropriate distribution but also the insufficient amount of money.

The point is that whatever the choice, it should not create more suffering for Indonesian people. In this sense, the government should be wise, smart, and brave enough to take all risks of its choice.