Removal of Malaysian Petrol Subsidy

Recently the Malaysian government removed part of the subsidy provided on petrol, reducing the amount by 20sen (roughly 6cents usd) per liter. The fuel subsidy, plus other subsidies on things like cooking oil, sugar, and rice is a drag on the government's budget each year. The reduction of this subsidy is predicted to result in a 3.3 billion MYR savings (about 1billion USD), but will continue to subsidy petrol to the tune of 24.8bil MYR a year. The reason the subsidy is being removed is because of a desire to reduce deficits and to moderate the balance of payments. In 2012, Malaysia's budget deficit was 4.5 percent of gross domestic product, the second highest in emerging markets after India. Prime minister Najib is quoted as saying, "Currently, our subsidy system benefits everyone, including the higher income group and foreigners."

He is absolutely right. I have quite enjoyed the subsidy, but noticed the hike when I went to the pump a few days ago. It used to cost me about 65 MYR to fill my tank, now its about 75. This will occur not only in transportation costs, but also ripple through costs for most consumer goods. Still, by western standards a very cheap price to pay, but this will hit Malaysians more than just at the pump. Many people complain about cost of living increases, a sign of a reduction in AS due to inputs. There is also the hope that this will ebb capital outflows that have occured recently as SEA markets have become more unstable.

The Falling Rupee

A couple of weeks ago a friend of mine asked if I had noticed anything about the SEA economies, such as Malaysia where I live, slowing down. I hadn’t really given it much thought, but since then have kept an eye on the news. The crash of the Rupee has been one of the biggest economic stories lately. A number of things have caused this fall in currency.

Manmohan Singh, the prime minister, addressed parliament on the matter. While part of the currency slump is a “natural” correction to reflect high inflation, he said, “foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening”. I would agree with that a bit, but the recent vote on Syria, the US potentially unwinding QE have certainly also had an impact as reasons why the currency is fluctuating and falling recently.

India has long wrestled with inflation. With a reluctance to increase interest rates to tame the inflation, which could further reduce growth (already fell 0.4% this quarter), India has to try to find other ways to appreciate the currency and slow inflation.

The central bank of India could raise interest rates which would attract foreign investors to come back, as they are now fleeing, which would raise demand for the currency and cause it to appreciate. However, this would also harm domestic industry. An expanding AS would cause a decrease in overall price levels and increase GDP, but it has been pointed out that India does not have a sector which could show that kind of growth in the short term even with the export growth one might enjoy with a weaker currency. That would potentially help with India’s current account deficit.

Unfortunately I don’t think there is an easy answer as the country is facing. There is somewhat of an impossible trinity here in that India cannot have control over all the currency value, monetary policy, and the free movement of capital. So far the new chairman, Raghuram Rajan, has expanded borrowing limits for banks. I can see that this might keep interest rates low allowing the economy to expand, but won’t this also cause further inflation and depreciation of the currency? In the meantime, at least it is good for some people who could stand to gain from this.