The Impact of Diverting Fuel Subsidy to Agricultural Sector on Income Distribution and Poverty

The government has been implemented various policies and programs to promote growth and at the same time to alleviate poverty. However, there is a problem of budget deficit as a result of a big expenditure on subsidy, especially the subsidy on fuel. Thus, the government tries to staggeredly reduce fuel subsidy and at the same time compensate poor households in the form of direct cash aid. It is found that this policy has a negative impact on macro-economic performance and an increase in poverty level, income disparity, and the depth of poverty. As an alternative to disbursement of direct cash aid to the poor in lieu to a reduction in fuel subsidy, our study tries to analyze if the government diverts fuel subsidy to the agricultural sector. Thus, the objective of this study is to analyze the impact of diverting fuel subsidy to food crops agricultural sector on income distribution and poverty using the Computable General Equilibrium (CGE) analysis. To evaluate the disparity in income distribution, this study employs the beta distribution function developed by Decaluwe, et al. (1999). To analyze poverty incidence for each household group, we follow the Foster, Greer and Thorbecke (FGT) method. Households are grouped into four categories, urban non-poor, urban poor, rural non-poor, and rural poor households. This study conducts three simulations based the percentage of reduction in fuel subsidy. Our simulation results reveal that diverting of fuel subsidy by 43.2 percent to food crops sub-sector resulting in an increase in income of the urban non-poor, rural poor and rural non-poor. Also, these simulation shows that diverting of subsidy is able to reduce head count index of the poor households in rural area.