Some time in November 2018, I got an email from a British company which specialises in making documentaries. They were making a documentary on the fugitive diamantaire Nirav Modi and wanted to know if I would like to be a part of it.
Of course, I said yes. For someone like me, this was as close as I would ever come to a film debut (not that I have any acting aspirations, but I am sure you get the drift).
We shot my portion, in a couple of hours, at the Business Centre at the Trident Hotel in Nariman Point. This was in May 2019. My job was to explain how Nirav Modi carried out the scam, which I did. As usual I turned it into a Ponzi scheme. There were a few provocative questions as well (I mean who doesn’t want masala), which I dodged.
I try to avoid doing videos as much as possible simply because I don’t think I am very good at doing things spontaneously. Also, I end up saying things which I later regret. Given this, I rarely like what I do on video.
But this was one-time when I was actually happy with myself on video, without having actually seen it (I still haven’t).
In late August this year, I got an email from the company saying that they had to chop off my part due to time constraints. And that’s how my Netflix debut which should have happened, went for a toss.
Of course, there is a good side to everything. The Trident Business Centre had a great view. One of the few places in Mumbai from which you can see the Mumbai docks, the RBI building and what used to be the Bombay Stock Exchange building (and is now simply the BSE building), all at the same time.
I also got around to understanding Nirav Modi’s scam in great detail, a lot of which made it into my book Bad Money.
And finally, I joined a long list of individuals whose contributions were cut out from movies, for the lack of time. (In my case, it happened to be a documentary).
Marutirao Parab’s comedy track was cut out from Sholay, Anupam Kher’s part as Disco Killer was cut out from Jaane Bhi Do Yaaro and most recently singer Bobby Cash’s excellent rendition of a song called Budhau from Gulabo Sitabo, had to face the chopping board. I would have really loved to see Amitabh Bachchan grooving to it. (Assuming they had shot it in the first place and not just recorded it).
Bad Boy Billionaires has quietly premiered on Netflix today, after an initial hassle, with some of the billionaires challenging its release in courts as it would damage their reputation.
And one thing I can clearly guarantee you is that my book Bad Money has a lot of dope on defaulting billionaires and how they went about it. (In case you still haven’t read it).
All is well, when it comes to two-wheeler and passenger-vehicle sales. Or so we have been told over the last few days.
The small industry which has developed over the last few months, and whose main job is to shout recovery recovery at a drop of a hat, is at it again.
But should we believe them? Or rather how much should we believe them?
As per Autocar domestic sales of passenger vehicles (of India’s major car companies) in September 2020, went up by around 35% to a little over 2.75 lakh units. The September 2019 sales had been at a little over 2.04 lakh units.
In fact, August 2020 sales of the same set of companies had been at around 2.01 lakh. When we take that into account, the recovery has been very good.
As per Rushlane, the domestic sales of India’s major two-wheeler companies in September 2020 stood at 17.81 lakh, up 11.6% from September 2019, when sales had stood at 15.95 lakh.
Varied reasons have been offered for this recovery. Let’s take a look at these reasons pointwise.
1) The pent-up demand is leading to higher sales (How do you argue against something like that?)
2)The economy is getting back on track. (Well!)
3)People do not want to use public transport due to the fear of the covid-pandemic and hence, are buying two-wheelers and cars. (Common sense and how do you argue against something like that).
4) Very low interest rates offered by banks on car loans. Take a look at the following chart.
Low interest rates
Source: ICICI Securities.
Car loan interest rates are as low as 6.5%. This has also helped push up sales. Along with low interest rates, many banks are offering very high loan to value, when it comes to entry-level cars. This means if the price of the car is Rs 5 lakh, some banks are willing to offer 95-100% of this price as a loan.
Also, as a research note authored by ICICI Securities analysts, Kunal Shah, Renish Bhuva and Chintan Shah points out, banks are offering, “cost-optimised financing schemes (tenure up to 7-8 years, step-up EMI, balloon EMI, low down payment options, scheme for low EMI for three months, etc).”
So, not only can customers borrow easily, they can do so in many different ways. They have better choice and all this is encouraging them to borrow (But are they borrowing is the real question?).
5)Also, the agriculture sector continues to do well, and this has meant increased purchasing power in rural India, which has led to an increase in the purchase of two-wheelers. (This is a story as old as the ages, when urban India doesn’t do well, rural India has to).
These are the reasons that have been offered for India’s automobile sector doing well. Now let’s take a look at whether a recovery has really happened.
1)What automobile companies refer to as domestic sales are essentially dispatches to dealers or factory gate shipments. These are units leaving the manufacturing facility for sales to consumers. They haven’t been sold as such. Generally, company dispatches are a reasonable indication of end consumer sale. But this time companies are building up inventory at the dealer levels in the hope of sales picking up during the so-called festival season. The building up of inventory has been necessitated by the new BS VI environmental norms, which has led to the requirement of building new inventory.
This does not mean that the whole dispatch ends up as dealer inventory but a substantial portion does.
2)Hence, a better way of looking at data is to look at the number of registrations. This data is released by the Federation of Automobile Dealers Association (FADA). As per this data, in August 2020, 1.79 lakh passenger vehicles were registered. This is around 25,000 units lower than the dispatches of 2.04 lakh units carried out by major car companies during August.
When it comes to two-wheelers, the gap is bigger. In August 2020, as per FADA nearly 8.99 lakh two-wheelers were registered. In comparison 14.94 lakh two-wheelers from major companies had been dispatched. There is a gap of close to six lakh units, which has ended up as inventory.
Take a look at the following table, which gives registration numbers of different kinds of vehicles.
Who is really buying?
2W = Two wheelers. 3W = Three wheelers. CV = Commercial vehicles. PV = Passenger Vehicles (Cars). TRAC = Tractors.
The sales and registration of commercial vehicles remains down in the dumps. This is hardly surprising given that the investment in the economy has totally collapsed. As per the Centre for Monitoring Indian Economy, the value of total new investments announced during July to September 2020, stood at Rs 58,601 crore, the lowest in fifteen years (without adjusting for inflation).
In fact, tractors are the only vehicles which have shown an increase in registration. This is due to the agriculture sector doing well and the rural rich doing well.
As per the VAHAN data released by the government, the total number of motor cars (as they call it) registered in August stood at 1.75 lakh . As per this data around 8.81 lakh two-wheelers were registered in August 2020, telling us the same story. Clearly, a significant portion of dispatches until August were for building inventory.
(Vahan data covers 1,242 out of 1,450 RTOs in the country. Hence, there is bound to be some discrepancy between company dispatches and registration numbers. But six lakh units, which is the difference in August in case of two-wheelers, is too huge to be just explained by this. FADA also refers to the Vahan database)
We do not have the September data for registrations as yet. But what we know clearly is that dealers have a lot of inventory piled up in the months up to August. And there is no reason for this to have stopped in September as well.
3)In fact, there is another factor that needs to be taken into account and that is the base effect. Two-wheeler and passenger vehicle registrations were already slow around this time last year. Hence, it makes sense to compare the 2020 numbers with the registrations that happened around this time in 2018. The registrations of motorcars as per Vahan data in August 2018 stood at around 1.96 lakh (compared to 1.75 lakh in August 2020). When it comes to two-wheeler registrations they stood at 12.12 lakh (compared to 8.81 lakh in August 2020). Hence, in that sense we are two-years behind when it comes to real consumer sales.
4)Let’s take a look at bank loans on this front. This is where things get very interesting. More than three-fourth of cars and two-wheelers were bought on loans before the covid-pandemic struck. The RBI does not give a proper division of different kinds of ‘vehicle loans’. But I guess even an overall number can be used to draw some inferences. The overall vehicle loans given by banks between end of March and August have contracted a little. This means that on the whole, people have been repaying loans and net-net banks haven’t given any fresh vehicle loans. While net-net between end March and end August there has been no fresh lending of vehicle loans by banks, some lending has happened in July and August. This stands at Rs 5,167 crore.
The question is if banks aren’t giving out vehicle loans how are all these vehicles being bought? Of course, banks aren’t the only financiers of vehicle loans, the non-banking finance companies (NBFCs) also finance the buying of vehicles.
Are NBFCs filling up this space? The NBFCs are also dependent on banks for financing. This means that NBFCs borrow from banks and then lend that money out. The overall bank lending to NBFCs has contracted by 1.3% or Rs 10,620 crore, between end March and end August.
Hence, the ability of NBFCs to continue financing vehicles, when their borrowing from banks has come down, is rather limited. This does not mean that banks are not interested in financing any kind of vehicle. They seem to be interested in financing cars but not two-wheelers. What this means is that if “genuine sales” don’t pick up, the huge inventories that the two-wheeler dealers have built up will become a problem for them. Car dealers will face the same problem though not of the same proportion.
5)Also, as far as financing goes, while banks are looking to finance a higher loan to value for entry level cars, that doesn’t seem to the case for cars as a whole. As Vinkesh Gulati, the president of FADA told Bloomberg Quint: “It has come to down to 65%-70%.”
6) Finally, what is surprising is that September also had the 16-day Shraad period from September 1 and September 17, when people believe it’s inauspicious to make purchases. In this scenario, it becomes even more difficult to believe that passengers vehicle sales (car sales) went up by as much as 35% during the month. It’s looking more and more like an inventory pile up at dealer level than genuine sales.
As Gulati had told Moneycontrol.com in mid-September: “This year all festivities will begin a month after Shraadh gets over and this period is also not considered to be good for sales in the North, East and West of the country. We are expecting September to be below August and also below last September.”
To conclude, as the economy opens up, automobile sales are bound to improve gradually. Nevertheless, there are several nuances that need to be kept in mind, before announcing an auto sector recovery. The auto-sector in India forms around half of the manufacturing sector and hence, is very important. And given that, it is important to analyse it carefully.
From the looks of it, the difference between genuine registrations at the retail level and the company dispatches, will only go up in September as the inventory pile up continues.
In fact, this inventory build-up might also be responsible to some extent for the increase in goods and services tax collections seen during September. The trouble is that the end consumer is yet to pay this tax.
At the end of every month, the Controller General of Accounts (CGA) declares the revenue and the expenses of the central government up until the last month. Hence, on September 30, the CGA declared the revenue and the expenses of the central government between April 1 and August 31.
Take a look at the following chart. It plots the decrease in gross tax revenue between April and August 2020 in comparison to the same period in 2019. The major taxes collected by the central government are income tax that you and I pay, corporate tax (income tax paid by corporates), customs duties, central goods and services tax, goods and services tax compensation cess and excise duties.
They all fall down
Source: Centre for Monitoring Indian Economy.
As can be seen in the above chart, the collections of all taxes have come down. The gross tax revenue is down 23.7% to Rs 5.04 lakh crore. Only one tax and that is excise duty, has grown during the course of this year. The growth is a huge 32.05% to Rs 1 lakh crore.
Given the economic contraction this year, it is hardly surprising that tax collections have crashed. The question is how has the collection of excise duties increased by almost a third?
This is primarily because of the central government increasing the excise duty it charges on petrol and diesel. This has been done twice in 2020. First in March and then again in May.
The excise duty on petrol stood at Rs 19.98 per litre, when it was increased by Rs 3 per litre in March and then again by Rs 10 per litre in May and now stands at Rs 32.98 per litre. When it comes to diesel, the excise duty on it stood at Rs 15.83 per litre in March. It was increased by Rs 3 per litre in March and Rs 13 per litre in May.
Take a look at the following table. It provides the price build up of petrol in Delhi as of March 1 and as of October 1.
High and low.
Source: Indian Oil Corporation.
This table makes for a very interesting reading. Let’s first understand how the mathematics of this works out using the data as of October 1.
The price charged to dealers is Rs 25.68 per litre. On this, the central government charges an excise duty of Rs 32.98 per litre. There is a dealer commission of Rs 3.69 per litre. Adding the price charged to dealers (Rs 25.98), the excise duty (Rs 32.98) and the dealer commission (Rs 3.69), we get a price of Rs 62.35 per litre. On this the local Delhi government charges a value added tax of 30%. This works out to Rs 18.71 per litre in this case.
Adding the value added tax, we get the retail selling price of Rs 81.06 per litre. The maths for the price as of March 1, works similarly, the difference being in the numbers and the taxes.
In March, the price of Indian basket of crude oil was around $55 per barrel. The latest price of the Indian basket of crude oil is around $41 per barrel. This is reflected in the fact that the price charged to dealers as of October 1, stood at Rs 25.68 per litre, lower than the Rs 32.93 per litre charged in March.
Despite the higher price charged to dealers, the retail selling price of petrol in March was at Rs 71.71 per litre as against Rs 81.06 per litre in October. The price as of today is 13% higher than that in March.
What’s happening here? Let’s take a look at it pointwise.
1) The total excise duty on petrol was at Rs 19.98 per litre in March. It has since gone up to Rs 32.98 per litre, Rs 13 per litre extra. This adds to the retail price.
2) The value added tax charged by the Delhi government has also increased from 27% to 30%. This also adds to the retail price though not as much as the increase in excise duties.
3) As of March 1, taxes amounted to Rs 35.23 per litre (excise duties + value added tax). This was against a price charged to dealers of Rs 32.93 per litre. Taxes amounted to 107% of the price charged to dealers.
As of October 1, taxes amount to Rs 51.69 per litre (excise duties + value added tax). This is against a price charged to dealers of Rs 25.68 per litre. Taxes now amount to 201% of the priced charged to dealers. This explains the higher retail price of petrol, despite the lower price charged to dealers, thanks to a lower oil price.
4) There is another way of looking at this data. In March, the total taxes amounted to around 49% of the retail price. In October, they amount to around 64% of the retail price. There has been a substantial increase in taxes.
5) The reason behind this increase is that the central government needs to meet its expenditure from somewhere. One point that often gets made on the social media is that the central government shares the increase in excise duties with the state governments. This isn’t totally true.
In May, the excise duty on petrol was hiked by Rs 10 per litre. Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with the state governments. Hence, the bulk of the increase has stayed with the central government.
Now let’s take a look at diesel pointwise. In this case, I am taking diesel price in Delhi as of February 12. I couldn’t find the data for March 1. But the logic remains entirely the same.
2) The total excise duty on diesel back then was Rs 15.83 per litre. Currently, it stands at Rs 31.83 per litre. This has added to the price of diesel.
3) As of February 1, the price charged to dealers was Rs 36.98. The excise duty was Rs 15.83 per litre. The value added tax worked out to Rs 9.56 per litre. Hence, total taxes (excise duty + value added tax) worked out to Rs 25.39 per litre or around 69% of the price charged to dealers.
As of October 1, the excise duty is at Rs 31.83 per litre whereas the value added tax works out to Rs 10.37 per litre. Hence, total taxes work out to Rs 42.2 per litre or 164% of the price charged to dealers.
4) Total taxes amounted to 39% of the retail price in February. They now work out to 60%.
5) In May, the excise duty on diesel was hiked by Rs 13 per litre. Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with state governments. Hence, the bulk of the increase has stayed with the central government.
This explains why you and I are paying a higher amount per litre of petrol and diesel, despite oil prices being lower from the time the covid-pandemic struck. Also, it needs to be mentioned here that the consumption of petroleum products has fallen every month between April and August. The following chart plots the same.
The interesting thing here is that thanks to a higher excise duty per litre of petrol and diesel, the collection of excise duties has risen, despite fall in consumption. Also, the other interesting bit here is that the consumption decline was at 8.4% in June. The situation has worsened since then.
In the last six years, the government hasn’t passed on the fall in the price of oil to the end consumer. In May 2014, when Narendra Modi took over as prime minister, the average price of the Indian basket of crude oil during the month was $106.85 per barrel. The following chart plots the average price of the Indian basket of crude oil during a particular year, over the years.
The above chart makes for a very interesting reading. The average price of the Indian basket of crude oil in 2020-21 at $35.74 per barrel, has been the lowest since 2003-04. But that is clearly not reflected in the retail price of petrol and diesel, thanks to higher taxes, particularly higher excise duties.
A May 2020 report by the Press Trust of India points out: “The tax on petrol was Rs 9.48 per litre when the Modi government took office in 2014 and that on diesel was Rs 3.56 a litre.” The Modi government has captured a bulk of the fall in price of oil over the years. This is clearly reflected in the following chart, which plots the excise duty earned by the government from petroleum products.
As can be seen from the above chart, the excise duty earned from petrol and diesel has more than doubled over the years. While, the government has captured a bulk of the fall in oil prices, there are no guarantees that it will protect the consumer, if and when oil prices start to go up again.
Also, this is a very easy way for the government to collect revenue. It allows them to go slow on more difficult ways, like selling stakes in public sector enterprises (PSEs), selling the massive land owned by PSEs, shutting down the badly run PSEs, fixing the badly implemented goods and services tax system, and so on.
Take a look at the following chart which compares India’s petrol and diesel prices with that of our neighbouring countries.
The Indian high
Source: Websites of oil companies in these different countries. Nepal prices from local newspapers. (I would like to thank Chintan Patel for putting this table together). Prices as of October 1, 2020.
The above chart clearly shows that the petrol and diesel prices are the highest in India. And as they say, there is no free lunch in economics. You and I are paying this higher price, not just when we buy petrol and diesel directly, but also when we pay for almost every product that is produced somewhere and delivered to where we are.