Petrol and Diesel Prices are High Due to Lower Corporate Taxes, Not Because of Oil Bonds

Life is what happens between WhatsApp forwards.

Yesterday evening, a friend from school WhatsApped a doubt he had. He wanted to know if petrol and diesel prices were high because the Narendra Modi government had to repay oil bonds, which had been issued by United Progressive Alliance (UPA) government more than a decade back.

To repay these oil bonds, money is needed. This has led to significantly higher central government taxes on petrol and diesel, which has in turn led to higher pump prices.

However convincing the argument may sound, it’s wrong. 100% wrong. And I have been saying this for a few years now.

Of course, my saying this hardly makes a difference, given that every time petrol and diesel prices rise, WhatsApp starts buzzing all over again with forwards blaming oil bonds issued by the UPA for high petrol and diesel prices. Currently, the price of petrol is more than Rs 100 per litre in several parts of the country.

This high price is on account of a higher excise duty collected by the central government in order to compensate for a fall in corporate tax collections. In that sense, you and I are bearing the cost of lower corporate taxes, in the form of a higher price of petrol and diesel. 

Let’s try and understand the issue of high petrol and diesel prices, and why things are the way they are, in some detail.

1) Crude oil prices have risen between last year and now. In June 2020, the average price of the Indian basket of crude oil was at $40.63 per barrel. As of June 16, 2021, the price was at $73.18 per barrel. Clearly, this is one reason behind the rise in petrol and diesel prices, but this isn’t the only reason, and not even the main one.

2) Before getting into any other detail, let’s understand what oil bonds are. These bonds were issued by the UPA government to the oil marketing companies (Indian Oil, Bharat Petroleum, Hindustan Petroleum), for the under-recoveries (the difference between the administrative price and the cost) they suffered when selling petrol, diesel, kerosene and domestic cooking gas, below their cost. This happened up until 2009-2010. Officially, these bonds are referred to as special securities issued to oil marketing companies in lieu of cash subsidy.

Instead of compensating companies immediately for the subsidy offered by them, by giving them money, the government gave them oil bonds, which would pay annual interest and mature a few years down the line. By doing this, the government expenditure during those years didn’t go up. This helped control the fiscal deficit in those years, when oil bonds were issued. Fiscal deficit is the difference between what a government earns and what it spends.

3) Of course, these bonds would mature over the years and the government of the day would have to repay them. And that would need money.
So what is the value of these bonds which the government still needs to repay?  In a question raised in the Rajya Sabha in December 2018, the government had said: “The current outstanding balance on account of Government of India (GoI) Special Bonds issued to the Public Sector Oil Marketing Companies (OMCs) in lieu of cash subsidy is about Rs 1.30 lakh crore.”

So, two and a half years back, the value of the outstanding oil bonds had stood at around Rs 1.30 lakh crore. What’s the latest number? Take a look at the following table. It has been sourced from the latest government budget. It lists out the different oil bonds that are still to be repaid, with their maturity dates.


What does this table tell us? It tells us that as of March 2021, the total outstanding oil bonds issued by the government stood at Rs 1,30,923 crore. Or the same as what the government had told the Rajya Sabha in December 2018.

4) In fact, the amount of outstanding oil bonds has barely changed during Modi government’s tenure. Look at the following tabled sourced from the 2014-15 budget, presented in July 2014, after Narendra Modi became prime minister.


As of March 2014, the total outstanding oil bonds stood at Rs 1,34,423 crore. Two different oil bonds with maturity amounts of Rs 1,750 crore each, matured in 2014-15, on March 7, 2015, and March 23, 2015, respectively. This brought down to the total outstanding oil bonds to Rs 1,30,923 crore, and which is the current outstanding amount as well.  

The point being that the government hasn’t had to repay any outstanding oil bonds since March 2015. Of course, it has had to pay an interest on these oil bonds, like it does on all other bonds.

How much is this interest? As the government told the Rajya Sabha in December 2018: “The annual aggregated amount of Rs 9,989.96 crore was paid every year during 2015-16 to 2017-18 and the similar amount is required to be paid in the current financial year.”

Given that, the outstanding amount of oil bonds didn’t change through 2018-19, 2019-20 and 2020-21, the government would have paid the same amount as interest in each of these years, as it did during 2015-16 to 2017-18.

How does the situation look in 2021-22, the current financial year? As can be seen from both the tables (I know the tables are not very clear. If you really want to verify the data, the source of the tables is available just below them. All you need to do is click), Rs 5,000 crore of bonds are due to be repaid on October 16 and November 28, respectively, later this year. This amounts to Rs 10,000 crore in total.

Over and above this, interest needs to be repaid on the outstanding bonds. Given that Rs 10,000 crore worth of bonds of the total Rs 1,30,923 crore of oil bonds, will be repaid during this financial year, the interest to be paid on the remaining bonds will be less than Rs 9,989.96 crore that the government has been paying year on year. A back of the envelope calculation tells us that the interest to be paid this year should amount to around Rs 9,500 crore.

Hence, in total, the government needs Rs 19,500 crore to repay oil bonds as well as pay interest on them during 2021-22. When it comes to government finances, this is small change.

5) If we look at the excise duty collected on petroleum products over the years, data from Petroleum Planning and Analysis Cell tells us that it stood at Rs 99,068 crore in 2014-15, the financial year in which Narendra Modi was sworn in as prime minister.

The number reached Rs 2,23,057 crore in 2019-20. It touched Rs 2,35,811 crore between April and December 2020, the first nine months of 2020-21. Given this, it would have crossed Rs 3,00,000 crore during 2020-21.

In 2021-22, the central government expects to collect more than Rs 3,00,000 crore through excise duties on petroleum products. A look at this year’s budget tells us that the government hopes to collect Rs 74,350 crore on special additional duty of excise on motor spirit(petrol) and Rs 1,98,000 crore through duty of excise on motor spirit and high-speed diesel oil (road and infrastructure cess). Just this adds to close to Rs 2.75 lakh crore.

Over and above this, one needs to pay a basic excise duty on every litre of petrol and diesel purchased, and there is an agriculture infrastructure and development cess to be paid as well. Clearly, this year, the government will earn more than Rs 3 lakh crore from different kinds of excise duties on petroleum products.

From February 2, 2021, the total excise duty on petrol and diesel has stood at Rs 32.90 per litre and Rs 31.80 per litre, respectively. The total central excise duties on petrol and diesel have been rising since 2014. They had stood at Rs 10.38 per litre and Rs 4.52 per litre in March 2014.

In fact, even in April 2020, they had stood at Rs 22.98 per litre and Rs 18.83 per litre, respectively.

Between April last year and now, the petrol price is higher by close to Rs 10 per litre just because of higher central government taxes on it. When it comes to diesel, it is higher by close to Rs 13 per litre because of this.

6) There is another small reason for higher prices as well. The state government taxes on petrol and diesel are ad valorem, that is they are a certain percentage of the price charged to dealers plus the excise duty of the central government plus the dealer commission on every litre of petrol and diesel sold.

Take a look at the following table, which has the detail for petrol sold in Delhi.


The price of petrol charged to dealers in Delhi by Bharat Petroleum was at Rs 37.68 per litre as on June 16. On this there was an excise duty charged by the central government of Rs 32.90 per litre along with a dealer commission of Rs 3.80 per litre. This adds up to Rs 74.38 per litre.

On this, the Delhi government charges a value added tax of 30%, which amounts to Rs 22.32 per litre. This leads to a retail selling price of Rs 96.70 per litre (Rs 74.38 plus Rs 22.32) in Delhi.

Like, the Delhi government, other state governments also charge a value added tax or a sales tax on petrol and diesel sold in their respective territories. The 30% tax charged by the Delhi government is ad valorem. Hence, if the petrol price charged to dealers goes up as oil price goes up, the tax collected by the Delhi government also goes up.

Over and above this, when the central government increases the excise duty on petrol, the tax collected by the Delhi government (and all other governments) goes up because the state government charges a value added tax on dealer price plus excise duty plus dealer commission.

Hence, every time you and I buy petrol or diesel, we are paying a tax on tax. This is an anomaly that needs to be set right. And state governments need to charge a sales tax just on the dealer price and commission, and not on the central government excise duty as well.

7) A major reason for the central government implementing a high excise duty on petrol and diesel, lies in the fact that the government’s tax revenues as a proportion of the size of the Indian economy, measured by the gross domestic product (GDP), has been falling over the years.

Look at the following chart. It plots the ratio of gross tax revenue earned by the central government as a proportion of the GDP.

Source: Centre for Monitoring Indian Economy and Controller General of Accounts.

What does this chart show? It shows that the gross tax revenue as a percentage of the GDP reached an all-time high of 12.11% in 2007-08. The gross tax revenue was at 11.22% of the GDP in 2017-18 and fell to 10.25% of the GDP in 2020-21.

The recent fall has been more because of a fall in corporate tax collections. In 2017-18, the corporate tax collections amounted to a total of 3.34% of the GDP and fell to 2.32% of the GDP in 2020-21. This was despite the listed companies registering bumper profits during the financial year.

Corporate taxes have come down primarily on account of the base tax rate being cut from 30% to 22% in September 2019 and to 15% from the earlier 25% for new manufacturing companies.

In absolute terms, the total corporate tax collected in 2019-20 had stood at Rs 5.57 lakh crore. It fell to Rs 4.57 lakh crore in 2020-21, thanks to lower tax rates. The collections of the goods and services tax have also not gone along expected lines.

To compensate for this to some extent, the government has had to increase the excise duty on petroleum products. Hence, it is only fair to say that the cost of lower corporate tax rates for the government, is being borne by citizens in the form of higher petrol and diesel prices. There is no free lunch, as I keep reminding.

To conclude, while the revenue earned by the government can vary, its expenditure doesn’t. It usually goes up year on year. In 2017-18, the total expenditure to GDP ratio stood at 12.53%. This jumped to 17.47% in 2020-21. Of course, 2020-21, could very well be an anomaly given that the size of the economy (GDP) contracted.

Nevertheless, the expenditure in 2019-20 had also stood at a higher 13.20% of the GDP, while the gross tax collections fell. And someone had to pay for this. 

What Does Official Government Inflation Mean for You? 

For May 2021, inflation as measured by the consumer price index (CPI) stood at 6.3%. It was the highest since November 2020, when it had stood at 6.93%. 

Of course, this has been splashed all over the media since yesterday evening when the figures were published. But do you ever sit back and think about what does inflation really mean for you? (I mean why would anyone sit back and think about inflation, but nonetheless please humour me for a bit). If you haven’t, let me set the cat among the pigeons.

1) The government publishes inflation as measured by the CPI every month. So, when it says inflation in May 2021 stood at 6.3%, does it mean that inflation for you, dear reader, also stood at 6.3%? Or that you paid 6.3% more for things on an average in May 2021 than you did in May 2020? Have you ever thought about this?

The CPI consists of many items whose prices are regularly tracked by the government (specifically, by the ministry of statistics and programme implementation). All these items have a certain weight in the index.

So, food items overall have a weight of 39.06% of the index. The assumption here is that the average Indian makes nearly two-fifths of his expenditure every month on food.

If you are reading this, chances are your expenditure on food every month as a proportion of your total expenditure, is lower than 39.06%. I say this simply because you are reading this in English, and anyone who can read English in India, is likely to be better off than an average Indian.

Hence, inflation of 6.3%, isn’t your rate of inflation. It can be higher or lower than this, depending on stuff you regularly consume.

Take the case of petrol prices. They have risen by 62.28% in the last one year, if we look at the inflation as measured by the wholesale price index (this data as per inflation as measured by CPI, hasn’t been published in the recent months).

In inflation as measured by the wholesale price index, petrol prices have a weight of 1.6%. In inflation as measured by CPI, they have a weight of 2.19%. Your expenditure on petrol as a part of your overall expenditure, is likely to be more than this.

Also, on a slightly different note, rising petrol, diesel and gas prices, feed into food prices, because food needs to be moved from where it is produced to where it is consumed.

2) As people earn more, their spending on food as a proportion of their overall spending comes down. Also, within the food basket, spending on cereals comes down and spending on foods which have protein (eggs, pulses, meat, etc.), goes up. The spending on milk also goes up. 

When it comes to the CPI, this can simply be gauged from the fact that the weightage that food has in the urban part of the CPI is much lower than the rural one. When it comes to urban India, the weightage of food items in the CPI stands at 29.62%. In case of rural India, the weightage is much higher at 47.25%.

This is primarily because the average urban Indian earns more than an average rural Indian and hence, incurs a lower proportion of the overall expenditure on food.

Of course, as people earn more, their spending on items other than food increases and that starts to matter more. Even here the stuff that CPI measures and your regular consumption basket may not intersect. Let’s take the case of household goods and services, a heading under CPI.

This heading keeps track of inflation of bedsteads, almirahs, dressing tables, chairs, furniture, bathroom and sanitary equipment, bedsheets, mosquito nets, air conditioners, sewing machines (yes, still!), washing machines, invertors, refrigerators, etc. In May 2021, the inflation for all these items overall stood at 3.89%. 

Here is the thing. While these items are important in the overall scheme of comfortable middle class living, they do not have any impact on regular expenditure, given that they are one-off purchases. Hence, they don’t impact your regular consumption and, in the process, your regular inflation.

But this is a point that is not important for the government. The government is trying to figure out the rate of inflation for the society at large, so that this can help in other ways, like figuring out the adequate level of interest rates for one. 

3) But there is a flip side to the above point as well. The health inflation in the last one year has been 8.44%. Now anyone who has had to deal with India’s urban private health system in the last one year, will tell you that is a load of bunkum. Prices have gone through the roof and the rate of inflation doesn’t really capture it. 

Of course, going to the hospital is also not something that most people do regularly (I am not talking about basic visits to a personal physician here). Hence, anyone who has had to spend some time in a hospital this year, or has had to finance a close one’s stay, would have ended up spending a lot of money and paid significantly higher prices than last year. 

So, one-off expenditures during a particular year can really make a mess of your finances, and that is something the inflation as measured by CPI doesn’t really capture.

Also, on a slightly different note, as Madan Sabnavis, the Chief Economist of CARE Ratings puts it: “Problem with most of the inflation numbers relating to personal care, health, recreation, transport is that once prices are increased they would not come down and hence becomes a new base.”

The point being that inflation measures the rate of increase in price over a period of one year. Hence, the annual inflation itself may not be high, but that doesn’t necessarily mean that things are not expensive.

4) Different states have different rates of inflation in different years. In 2019-20, among large states, Kerala had the highest rate of inflation at 6.1%. Bihar had the lowest at 2.2%. 

Source: Reserve Bank of India. 

What does this mean? It means that the inflation you experience also depends on which part of the country you are in and the inflationary pressures it is experiencing during a particular year. Of course, within a state, whether you are in an urban area, or a rural one, also makes a difference.

5) Clearly, the official rate of inflation doesn’t tell you much about anything. Hence, what can you do about it? First and foremost, you need to do an expenditure audit and figure out the things you spend your money on regularly (you will be surprised). This shouldn’t be so difficult if you make purchases online or make payments digitally or use plastic money. 

The important point here is to identify the most important items and not every possible one, and keep track of expenditure on the important items, over a period. A simpler method is to just keep track of regular monthly expenditure and that too can give you some inkling which way your finances are headed, and whether you are spending more or less than you were doing in the past. 

This is not a totally foolproof and methodical system but more of a crude method to get around the uselessness of the official rate of inflation at an individual level, when it comes to consumption. Of course, there are other implications which I do keep talking about. 

What Other Countries Will Learn from Chinese Crackdown on Cryptos

The Chinese government has been cracking down on bitcoin and other cryptocurrencies. This, along with a few other reasons, has led to cryptocurrencies crashing from their all-time high levels over the last few months.

The question is why is the Chinese government doing this? The simplest answer lies in the fact, and as I have explained on multiple occasions before, up until cryptocurrencies came along, the right to create money out of thin air was only with the governments.

Cryptocurrencies challenge that hegemony, and which has been their basic selling point over the years. The trouble is that the right to create money out of thin air is something any government isn’t going to give up on easily. The history of money tells us that while different forms of money emerge privately, it is the government which usually controls the monetary system.

This is a point that the economist John Maynard Keynes made in A Treatise on Money, in which he said that all modern states have had the right to decide what is money and what is not, and they have had it “for some four thousand years at least”. This is a point most crypto bulls don’t seem to get.

Another reason offered behind the Chinese crypto crackdown is that bitcoin and other cryptocurrencies are coal intensive. This is something that entrepreneur Elon Musk also said when he tweeted on bitcoin around a month back.

Now what does this mean?

Over the years, it has become more and more difficult to mine bitcoin. These days bitcoin farms with giant racks of mining computers are needed to mine bitcoins.

As Jacob Goldstein writes in Money – The True Story of a Made-Up Thing:

“People started building special computers optimized to mine bitcoin… Then they started filling giant warehouses full of racks of those mining computers. The computers sucked up so much energy that miners began seeking out places in the world where power was cheap, to lower their costs of mining. Vast mining operations sprung up in Iceland, Mongolia, and, especially, China.”

The point being bitcoin mining ends up using a lot of electricity. And most of this electricity is generated through fossil fuels. 36% of the electricity worldwide is generated through the use of coal and 23% through the use of natural gas. The burning of fossil fuels emits greenhouse gases.

As Bill Gates writes in How to Avoid a Climate Disaster:

“Greenhouse gases trap heat, causing the average surface temperate of the earth to go up. The more gases there are, the more the temperature rises. And once greenhouse gases are in the atmosphere, they stay there for a very long time; something like one-fifth of the carbon dioxide emitted today will still be there in 10,000 years.”

Bitcoin mining adds to this pollution.

As Dylan Grice writes in the latest edition of the Popular Delusions newsletter: “China is also concerned that bitcoin mining in the country is coal intensive and that is complicating efforts to reduce pollution.”

While this is an extremely valid argument, the trouble is all this has been well known for a while. So, why is it being brought up now? And that’s where things get interesting. It is being brought up now simply because the Chinese governments cannot openly talk about the real reason behind cracking down on bitcoin and other cryptos.

And what’s the real reason?

The success of cryptocurrencies has made governments realise that they need to be in on the game as well. This has led to governments and central banks, including that of China, planning their own digital currencies.

What is a central bank digital currency?

As Mark Carney writes in Value(s)—Building a Better World For All:

“A central bank digital currency would be an electronic form of central bank money that could be used by the public to make digital payments. Currently when we make payments with our debit cards or mobile phones we are using private money originally created by banks. Our only access to the ultimate risk-free asset of the central bank is when we use physical cash.”

The use of physical cash is declining rapidly and central banks feel that they need to get into that space by creating their own digital currency. If they don’t get into that space and people start using other digital currencies, it creates a problem for them, albeit minor one initially, but still a problem.

As mentioned earlier, the governments have the right to create money out of thin air, and sharing that with others is something that they are obviously not comfortable with.

As Grice writes: “From what we can glean from our friends in China, its motivation [behind the crackdown] was partly related to the roll-out of its own digital currency.” China is planning to launch its own central bank digital currency and given that it wants to wean off its citizens from the various cryptocurrencies that they are currently using.

In fact, China is already testing its digital currency. A report on points out that the plan is to hand out 40 million renminbi (or around $6.2 million) to a group of people in a lottery. The money can then be spent with selected merchants.

Also, there is another factor at play. China has one of the highest investments to gross domestic product (GDP) ratios in the world. Data from World Bank points out that in 2019, the ratio for China stood at 43.3%, when the global ratio was at 24.4%.

Hence, a bulk of Chinese savings get channelised into investments and this has over the years helped create massive economic growth. Bitcoin and other cryptos allow the Chinese to tunnel their money out of China, something that the Chinese government isn’t comfortable with. And like the Chinese government most governments won’t be comfortable with this.

As Grice writes: “It [i.e. the Chinese government] wants to ensure that growing familiarity with digital currency among its population doesn’t translate into growing use of digital currencies to evade China’s capital controls.”

These are the lessons that other governments and central banks around the world can easily pick up from the latest Chinese crackdown on cryptos. Hence, in the time to come, the government crackdown on cryptos will only go up.

Privatization by Malign Neglect: Nationalized Banks Gave Out Just 6% of Banking Loans in 2020-21

One story that I have closely tracked over the years is the privatization of the Indian banking sector, despite the government continuing to own a majority stake in public sector banks (PSBs). I recently wrote a piece in the Mint newspaper regarding the same.

The moral of the story is that the PSBs have continued to lose market share to the private banks, over the years. This is true of both deposits as well as loans.

In the last decade and a half, when it comes to loans, the share of PSBs in the overall lending carried out by scheduled commercial banks in India  peaked at 75.1% in March 2010. As of March 2021, it had fallen to 56.5%.

When it comes to deposits, during the same period, the share of PSBs in the total deposits raised by scheduled commercial banks peaked at 74.8% in March 2012. As of March 2021, it had fallen to 61.3%. Meanwhile, the private banks had gained share both in loans as well as deposits. (For complete details read the Mint story mentioned earlier).

One feedback on the Mint story was to check for how well PSBs other than the State Bank of India (SBI), the largest PSB and the largest bank in India, have been doing. In this piece, I attempt to do that. Data for this piece has been drawn from the Centre for Monitoring Indian Economy (CMIE) and several investor presentations of SBI. The data takes into account the merger of SBI with its five associate banks as of April 1, 2017.

Let’s take a look at the findings point wise.

1)  Let’s start with the share of different kinds of banks in the overall banking loan pie.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

In the last 15 years, the share of SBI in the overall banking loan pie has been more or less constant (look at the blue curve, it seems as straight as a line). It was at 23.1% as of March 2006 and it stood at 22.7% as of March 2021. Clearly, SBI has managed to hold on to its market share in face of tough competition from private banks.

But the same cannot be said of the other PSBs, which are popularly referred to as nationalized banks, given that they were private banks earlier and were nationalized first in 1969 (14 banks) and later in 1980 (six banks).

The share of these banks in the lending pie has fallen from 47.9% in March 2006 to 33.8% in March 2021.

In fact, the fall started from March 2015 on, when the share of the nationalized banks in overall lending had stood at 50.1%. This is when the Reserve Bank of India (RBI) rightly started forcing these banks to recognise their bad loans as bad loans, something they had been avoiding doing since 2011, when the bad loans first started to accumulate. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more.

Not surprisingly, the share of private banks in the banking loan pie has been going up. It is up from 20% to 35.5% in the last 15 years, though a bulk of the gain has come from March 2015 onwards, when the share was at 20.8%. Clearly, the private banks have gained market share at the cost of nationalized banks. As stated earlier, SBI has managed to maintain its market share.

2) Now let’s take a look at the deposit share of different kinds of banks.

Source: Author calculations on data from
the Centre for Monitoring Indian Economy
and the investor presentations of SBI.

The first thing that comes out clearly is that the shape of the curves in this chart are like the earlier chart, telling us that conclusions are likely to be similar.

When it comes to overall banking deposits, the share of SBI has been more or less constant over the last 15 years. It has moved up a little from 23.3% to 23.8%, with very little volatility in between.

For nationalized banks, it has fallen from 48.5% to 37.4%, with a bulk of the fall coming post March 2015, when it had stood at 51%.

The fall in market share of nationalized banks has been captured by private banks, with their share moving up from 19.4% to 29.9% in the last 15 years. Again, a bulk of this gain has come post March 2015, when their market share was at 19.7%. Clearly, as nationalized banks have been trying to put their house back in order, private banks have moved in for the kill and captured market share.

The two charts clearly tell us that the banking scenario in India has been changing post March 2015, but they don’t show us the gravity of the situation.

To do that we need to look at the incremental loans given out by the banks each year and the incremental deposits raised by them during the same year. Up until now we were looking at the overall loans given out by banks and the overall deposits raised by them, at any given point of time.  

3) Let’s take a look at the share that different kinds of banks have had in incremental loans given out every year. Incremental loans are obtained in the following way. The outstanding bank loans of SBI stood at Rs 25 lakh crore as of March 2021. They had stood at around Rs 23.7 lakh crore as of March 2020.

The incremental loans given between March 2020 and March 2021, stood at Rs 1.3 lakh crore. This is how the calculation is carried out for different banks across different years. The number is then divided by the incremental loans given out by scheduled commercial banks, and the market share of different kind of banks is obtained.

In 2020-21, the total incremental loans given by the banks stood at Rs 5.2 lakh crore. Of this, SBI had given out around Rs 1.3 lakh crore and hence, it had a market share of around one-fourth, when it came to incremental loans given by banks.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

The above chart tells us is that post March 2015, a bulk of incremental lending has been carried out by private banks. In 2014-15, the private banks carried out by 35.6% of incremental lending. This touched a peak of 79.5% in 2015-16 and their share was at 58.9% in 2020-21, the last financial year.

SBI’s share in incremental lending hasn’t moved around much and it stood at 24.4% in 2020-21.

The real story lies with the nationalized banks. Their share of incremental lending has collapsed from a little over half of the incremental lending in 2013-14 to just 0.2% in 2019-20. In 2020-21, it was slightly better at 6.3%.

These banks have barely carried out any lending in the last five years, with their share being limited to 6.1% of the incremental loans that have been given during the period. SBI’s share stands at 25.3% and that of private banks at 59.9%.

4) Now let’s look at how the share of incremental deposits of different kinds of banks over the years.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

This is perhaps the most noisy of all the charts up until now. But even here it is clear that the share of nationalized banks in incremental deposits has come down over the years. It was at 50.9% in 2013-14. In 2017-18, the deposits of nationalized banks saw a contraction of 8.5%, meaning that the total deposits they had went down between March 2017 and March 2018. In 2020-21, their share of incremental deposits stood at 26.3%.

The chart also tells us that in the last six years, the private banks have raised more deposits during each financial year, than SBI and nationalized banks have done on their own.

5) In the following chart, the incremental loan-deposit ratio of banks has been calculated. This is done by taking the incremental loans given by banks during a particular year and dividing it by the incremental deposits raised during the year.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

The curve for non SBI PSBs is broken because in 2017-18,
the banks saw a deposit contraction,
and hence, the incremental loan deposit ratio
of that year cannot be calculated.

The incremental loan deposit ratio of nationalized banks collapsed to 0.5% in 2019-20 and 7.4% in 2020-21. What this means is that while these banks continue to raise deposits, they have barely given out any loans over the last two years. In 2019-20, for every Rs 100 rupees they raised as a deposit they gave out 50 paisa as a loan (Yes, you read that right!). In 2020-21, for every Rs 100, they raised as a deposit they gave out Rs 7.4 as a loan.

One reason for this lies in the fact that many of these banks were rightly placed under a prompt corrective action (PCA) framework post 2017 to allow them to handle their bad loan issues.

This placed limits on their ability to lend and borrow. Viral Acharya, who was a deputy governor of the RBI at that point of time, did some plain-speaking in a speech where he explained the true objective of the PCA framework:

“Such action should entail no further growth in deposit base and lending for the worst-capitalized banks. This will ensure a gradual “runoff” of such banks, and encourage deposit migration away from the weakest PSBs to healthier PSBs and private sector banks.”

The idea behind the PCA framework was to drive new business away from the weak banks, give them time to heal and recover, and at the same time ensure they don’t make newer mistakes and in the process minimize the further accumulation of bad loans. This came at the cost of the banks having to go slow on lending.

As I keep saying there is no free lunch in economics. All this happened because these banks did not recognise their bad loans as bad loans between 2011 and 2014, and only did so when they were forced by the RBI mid 2015 onwards.

There is a lesson that we need to learn here. The bad loans of banks will start accumulating again as the post covid stress will lead to and is leading to loan defaults. It is important that banks do not indulge in the same hanky-panky that they did post 2011 and recognise their bad loans as bad loans, as soon as possible.

What banks did between 2011 and 2014, when it comes to bad loans, has already cost the Indian banking sector a close to a decade. The same mistake shouldn’t be made all over again.

Now with many of the nationalized banks out of the PCA framework, their deposit franchises remain intact, nonetheless, they don’t seem to be in the mood to lend or prospective borrowers don’t seem to be in the mood to borrow from these banks, and perhaps find borrowing from private banks, easier and faster.

Of course, one needs to keep in mind the fact that 2020-21 was a pandemic year, and the overall lending remained subdued.

Meanwhile, the private banks keep gaining market share at the cost of the nationalized banks. This means that by the time the government gets around to privatizing some of these banks, if at all it does, their business models are likely to have completely broken down. They will have deposit bases without adequate lending activity. 

The nation shall witness what Ruchir Sharma of Morgan Stanley calls privatization by malign neglect, play out all over again, like it had in the airline sector and the telecom sector, before this.


When It Comes to Vaccines, Govt Tells Us One Thing, Supreme Court Another

On May 13, the government told us that between August and December this year, the covid vaccine availability/production will be ramped to around 216 crore doses. Tweets were published by several government handles. (You can take a look here and here).

Many media reports were also published regarding the same. As the Mumbai edition of The Times of India reported on May 14: “Setting out its roadmap to vaccinate the around 95 crore 18-plus population, the Centre said on Thursday India should be able to access nearly 217 crore doses between August and December.”

The following table shows how the 216-crore number was arrived at.

Source: Ministry of Health and Family Welfare. In case you are unable to see the table, click here.

Several ministers reiterated this message. Prakash Javadekar, who holds multiple portfolios in the government, said: “India will get 216 crore new vaccines by December. India will be able to vaccinate more than 108 crore people with the help of these vaccines.” The health minister Dr Harsh Vardhan also made a similar statement.

The underlying message here was that the vaccine shortage, if any, would not be a problem in the months to come. Over the next few days, WhatsApp and other social media kept buzzing with this message. The above table was shared over and over again. The Be Positive crowd had a field day. So far so good.

The trouble is that the numbers in the table are just that, numbers. Allow me to explain.

75 crore doses of the Covishield vaccine are expected to become available between August and December, a period of five months. This implies a production capacity of 15 crore doses per month on an average.

In a submission to the Supreme Court on May 9, the government had said that the manufacturing capacity of the Serum Institute, the company which manufactures Covishield, is expected to go up from 5 crore doses per month to 6.5 crore doses by July 2021. Increasing production capacity from 6.5 crore doses per month to 15 crore doses per month is going to be some task.

Of course, the government always has the option of importing the Astra-Zeneca vaccine doses (which is locally manufactured as Covishield). But even if the government decides to import, the difference between the local production capacity and the projection of 15 crore doses per month on an average, is huge. Further, any imports will come at the expense of denting the atma nirbharta narrative.

When it comes to Covaxin, the estimated production between August and December has been assumed to be at 55 crore doses. This implies a production of 11 crore doses per month on an average.

The central government told the Supreme Court on May 9 that the manufacturing capacity of Bharat Biotech, the company which currently manufactures Covaxin, is expected to go up from 90 lakh doses per month to 2 crore doses per month, and further increase to 5.5 crore doses per month by July 2021. So, 5.5 crore doses a month is half of the 11 crore doses per month that is required as per the government’s calculation.

Of course, it needs to be remembered that the intellectual property for Covaxin is shared between Bharat Biotech and the Indian Council of Medical Research. Hence, Covaxin will also be manufactured by three public sector manufacturing facilities. These are Indian Immunologicals, Hyderabad, Haffkine Biopharmaceuticals, Mumbai, and Bharat Immunologicals and Biologicals, Bulandshar.

Based on this, the government told the Supreme Court: “This is projected to enhance Covaxin‟s current manufacturing of 1 crore doses/month to nearly 10 crore doses/month in the next 8-10 months.”

So, Covaxin’s production is expected to touch 10 crore doses per month only in 2022. At least, that’s what the central government told the Supreme Court. Nevertheless, that did not stop them from telling you and I, that 11 crore doses per month of Covaxin will be produced on an average between August and December. Given this, the vaccine production projections made by the government, don’t pass the basic smell test. 

And we aren’t done with this yet. A close look at the above table tells us that it also includes doses from vaccines which haven’t been cleared for production. In fact, this was precisely the point made by the two amici appointed by the Supreme Court ( Jaideep Gupta and Ms Meenakshi Arora) in the Suo Moto writ petition that the Court is currently hearing.

As Wikipedia points out: “An amicus curiae (literally, “friend of the court”; plural: amici curiae) is someone who is not a party to a case who assists a court by offering information, expertise, or insight that has a bearing on the issues in the case.”

As the Amici told the Supreme Court:

“The [central government] has claimed that it will be able to vaccinate a substantial number of persons (around 100 crore persons requiring 200 crore doses) by December 2021. However, no projections have been shared with this Court regarding how this target would be achieved. Based on reports, it appears that the [central government] has factored a number of vaccines that are currently in their development stages to reach its projected number of 200 crore doses. This approach would be misguided as the success and efficacy of vaccines that are currently in the stage of clinical trials is uncertain and cannot be guaranteed.”

The interesting thing is that the central government hasn’t presented any projections of vaccine availability to the Supreme Court and in an affidavit submitted to the Court on May 9, it said: “It is difficult to predict the projections for vaccines given that it depends on variable factors such as introduction of new foreign vaccines, capability of increased production by existing manufacturers, among others.”

Of course, the variable factors did not stop the government in confidently telling us that 216 crore vaccine doses would become available between August and December, later this year. Something, it didn’t have the confidence to tell the Supreme Court on May 9, it told the country on May 13, four days later, and has been saying it over and over again since then.

What this tells us is that the submissions to the Supreme Court are clearly not good WhatsApp material and hence, things can be said as the way they are.

Nevertheless, the Solicitor General, during the course of his oral submissions to the Supreme Court, did say: “He is in a position to address these concerns of this Court and that the UoI aims to vaccinate approximately 100 crore persons by the end of December 2021.”

Nonetheless, there is a huge difference between an aim, a plan, and a projection, as we have seen in the calculations earlier in this piece. Numbers are just numbers and can easily be tortured to arrive at what one wants to say. The table accompanying this piece is an excellent example of this phenomenon.  

But then on WhatsApp who is bothered about the details and the nuance. So, the main aim of the government was to project a confident be positive narrative and it did just that.

To conclude, it is safe to say that there is one truth out there for the Supreme Court and another for the country at large.