India has long been familiar with the sound and fury that fuel subsidies can unleash politically, as well as the conundrum they present in a democracy. Subsidies are usually bad news for the economy, but politicians who move to slash them do so at their own peril. This is the situation being faced by Indonesia’s President Susilo Bambang Yudhoyono.
Undeterred by heavy rain, thousands of protesters stormed Jakarta’s streets on Monday as the House of Representatives met to discuss a budget that would see fuel prices rise by 33 per cent. The move comes at a time when the confidence of foreign investors in the country’s prospects for continued economic growth has been wavering. President Yudhoyono’s efforts at economic reform have stalled in recent years, leading to a downgrade last month of Indonesia’s sovereign credit to stable from positive, by ratings agency Standard & Poor’s. An exodus of foreign investors from capital and debt markets has also adversely affected the currency with the rupiah hitting a four-year low against the dollar last week.
Though the move, if approved, will lead to savings worth billions of dollars it will also inevitably spell inflation. An increase in the price of fuel has knock on effects by leading to higher costs for numerous items like food staples and public transportation. The unpopularity of the decision is not good news for the President who is already embattled by corruption scandals and accusations of constant dithering.
With scheduled elections only a year away, Mr. Yudhoyono has therefore also put forward a proposal for around $900 million in cash handouts to alleviate the effects of rising prices on the poorest families.
Regardless, no government can slash fuel subsidies in Indonesia with equanimity. A fuel price hike in 1998 triggered riots that played a significant role in toppling dictator Suharto. Last year, Parliament rejected a similar plan to raise fuel prices amid fears of the political backlash any such move would generate.
The proposed plan will raise the price of gasoline from around 50 cents to 65 cents per litre and diesel fuel from 50 cents to 55 cents. Fuel prices are among the cheapest in the region in Indonesia, which is the largest of Southeast Asia’s economies. In fact according to the World Bank, the country has the lowest fuel prices of any net oil-consuming nation in the world. It is estimated that by cutting the subsidy the government will save $9.5 billion this year.