First off, it is important to understand that the dramatic cut in fuel prices by the government is not any largess being given by the Indian government or by the Goods and Services Tax.
Simply put under GST the Indian government can no longer collect excise duty on fuel imports by Bhutan and later refund them to the Bhutanese government as excise revenue.
With no excise duty the government had a clear option of raising taxes on fuel within Bhutan to keep the Nu 1.5 bn in annual revenue.
The government has instead decided to pass on the full excise duty of around Nu 1.5 bn a year to Bhutanese consumers.
Critics of the move may point to the loss of revenue and fiscal balance or even possibly increased imports of fuel.
However, the move is a largely positive and much needed one for several reasons.
The first is that given the landlocked nature of Bhutan far away from several major supply centers the cost of goods and services like in construction are much higher compared to the region. Simply put it is cheaper to build a house in Gangtok which is closer to Siliguri than in Thimphu due to the transportation costs.
This reduction will most importantly bring down inflation in Bhutan which will help all sections, and especially the lower income category which are hardest hit by inflation.
One of the biggest complaints from the private and non government sector for a while has been that the government consumes the chunk of any economic windfall like higher electricity tariff rates, new power projects etc through civil service pay hikes, more current expenditure etc.
This is one of the rare times that the government is actually giving priority in sharing the benefits to all sections of the Bhutanese populace and economy from a farmer to an urban dweller.
A move like this will importantly have an important stimulus impact on the private and agricultural sector for which transportation and fuel costs are a major expenditure. This will spur business and investment and increase the competitiveness of Bhutanese businesses and farmers.
Another great leveler is the fact that it is usually the vast majority of the poor and the middle class that use public transport in Bhutan like buses and taxis. Since the RSTA is already empowered to set rates for buses and taxis, a reduction in prices will mean less transportation costs for the large bulk of the country’s population.
On the fiscal side given the careful spending of the government and a tight fiscal belt it has some space to do this especially with Tala soon paying of it’s loan and Mangdechu coming on line next year.
All in all, this is a welcome move that spreads the wealth to all sections, brings down inflation and acts as a boost for the economy.
Nothing so weakens a government as inflation
John Kenneth Galbraith