What’s the Real Story Behind High Petrol and Diesel Prices?

Vivek Kaul and Chintan Patel

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Between 2014-15 and now, taxes imposed by the central government on petrol and diesel have increased by 217% and 607%, respectively. The central government tax on diesel has gone up from Rs 4.50 per litre in 2014-15 to Rs 31.80 per litre currently. This is the real story. 

Petrol and diesel prices are at an all-time high across the country. When it comes to petrol, prices have crossed the 100-rupee-per-litre mark, in many states. As expected, the central government is being questioned on this price rise.

On July 2, the finance minister Nirmala Sitharaman said that no discussions were underway to arrest the rising price of petrol and diesel. Her response to a question on rising prices of petrol and diesel was: “When the international price of crude oil is higher, we have to increase the prices and when the international price is lower, we have to decrease the prices here too. This is a market mechanism which is followed by oil marketing companies. We have given them the freedom.”

Citing the financial burden of the central government’s efforts on vaccine procurement, health infrastructure, and free food to the poor, she added that “state governments can give relief by reducing taxes or levies on petrol.”

In fact, a couple of months ago, she had referred to the taxation of fuels as a “dharamsankat”.  So, what is this dharamsankat that Sitharaman bemoans?

Also, a lot of WhatsApp forwards have been going around explaining why it is impossible for the Narendra Modi government to cut petrol and diesel prices. One reason being offered is that the government needs to repay oil bonds issued by the previous UPA government. As we had explained on an earlier occasion this isn’t true. It’s just propaganda, albeit excellently run.

In this piece, we take the story forward with the hope that it can tackle some of the WhatsApp propaganda around petrol and diesel prices that is currently on.

Price breakdown

In most situations in business, a product is sold at a price which includes the cost of manufacturing the product, the taxes that the company has paid in the process of manufacturing it and the profit margin that the company hopes to earn. Of course, the taxes aren’t a major portion of the overall price.

That’s not true for petrol and diesel in India. Taxes, as we shall see, form a significant part of the overall retail price. The retail price or the price we pay for petrol and diesel at the pump, is made up of four components – a) The price at which the dealer buys petrol and diesel from the oil marketing companies like Indian Oil, Bharat Petroleum or one of the private companies. This price includes the cost of producing petrol and diesel and getting it to the pump where it is sold. It also includes the profit margin of these companies. b) The central government tax. c) The state government tax. d) Dealer commission.

Of the four components, the price at which the dealer buys petrol and diesel from the oil marketing company, is the biggest variable. It is tied to the price of international crude oil. If the price of oil goes up, as it has since April 2020, the price of petrol and diesel also go up. In April 2020, the average price of the Indian basket of crude oil had fallen to $19.9 per barrel.

In June 2021, it averaged at $71.98 per barrel. As of July 13, it had risen to $74.97 per barrel. This, as Sitharaman said, is the main reason for the increase in petrol and diesel prices in the recent past. We would like to say that this is not the reason, but a reason. We will explain the details as we go along.

India produces very little oil of its own. In fact, the overall import dependency in April and May this year was at 85.4%. We are heavily dependent on oil imports. Hence, if price of oil goes up internationally, the price of petrol and diesel also go up within the country.

Now getting back to the components of the retail price of petrol and diesel. The second component is the central government tax, which is the central excise duty. This is fixed and only changes when the government decides so. (The central excise duty has further components, but we won’t get into that in this piece).

Then comes the state government tax on petrol and diesel. Some states refer to it as sales tax and in some other states it is called the value added tax. This tax is over and above the central excise duty and varies from state to state.

The pumps through which petrol and diesel are retailed also need to make some money. They earn a dealer commission, which is also a part of the per litre retail price . Having said that, the dealer commission is a small fraction of the total price, and mostly inconsequential in affecting the final retail prices of petrol and diesel.

Let’s look at the retail price breakdown of petrol and diesel in Delhi as of  July 1, 2021. The following table shows us that.

 Table 1. Price breakdown of petrol and diesel
(in Rs per litre): July 1, 2021 (Delhi)

Source : https://hindustanpetroleum.com/documents/pdf/pb/petrol.pdf

Let’s consider the price of petrol and try and understand this structure in detail. The price charged to the dealer is Rs 39.33 per litre. On this the central government charges an excise duty of Rs 32.90 per litre. Then there is a dealer commission of Rs 3.82 per litre.

These three entries add up to Rs 76.05 per litre. On this price, the Delhi government charges a value added tax of 30%, which works out to Rs 22.82 per litre. This is added to Rs 76.05 per litre and it adds up to a retail selling price of Rs 98.87 per litre of petrol.

It is interesting to note, the value added tax of the state government is charged on Rs 76.05 per litre, which also includes a central excise duty of Rs 32.90 per litre. This means that when you and I buy petrol we are paying a tax on a tax.  This is true across the length and breadth of India and not just in Delhi.

Also, it is worth mentioning that the value added tax or the sales tax of the state governments is ad valorem, which means it is a certain proportion of the sum of the dealer price, central excise duty and dealer commission.

So, if the dealer price goes up or the central government decides to increase the excise duty, the state governments earn a higher tax per litre of petrol sold. What is true for petrol is also true for diesel, though the numbers change and so does the calculation accordingly.

Now let’s look at what proportion of the retail sales price do each of the four components form. Figure 1 and Figure 2 show that for petrol and diesel, respectively. The data is as of July 1.

Figure 1


Source : https://hindustanpetroleum.com/documents/pdf/pb/petrol.pdf

Figure 2

Source: https://hindustanpetroleum.com/documents/pdf/pb/petrol.pdf

Figure 1 and Figure 2 make for a very interesting reading. In case of petrol, the dealer price forms 39.8% of the retail price of petrol. The rest are largely taxes, imposed both by the central government and the state government. The taxes added up to 56.4% of the retail selling price of per litre of petrol in Delhi as of July 1.

Along similar lines, the dealer price makes for 46.8% of the retail price of diesel. The rest are largely taxes. Taxes amount to 141.7% of the dealer price for petrol and 107.3% of the dealer price for diesel. So, taxes form a significant portion of the price of petrol and diesel.

The interesting thing is that the central excise duty on petrol and diesel has been raised over the years. Up until early May 2020, the excise duty on petrol was Rs 22.98 per litre. It was raised to Rs 32.98 per litre. When it comes to diesel, the excise duty was raised by Rs 13 per litre, from Rs 18.83 per litre to Rs 31.83 per litre.

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. Clearly, a significant proportion the increase in price of petrol and diesel over the last one year has been due to an increase in the excise duty charged by the central government. Hence, it’s not just about global oil prices going up, as Sitharaman would like us to believe.

In fact, in May last year, India had the distinction of being the highest taxer of auto fuels in the world, a whopping 69%.  Since then, the portion of petrol and diesel prices that goes towards taxes, to both the central government and the state governments, has come closer to 50%, although the retail price at the pump has increased. Irrespective of whether it is 69% or 50%, taxes on petrol and diesel in India are high. Has it always been like that, or is it a recent development?

Let’s examine. Figure 3 plots the breakdown of the retail price of petrol over the years in Delhi (We are not obsessed with Delhi. But regular data in the public domain is only available for Delhi, hence, limiting our choice). For the sake of avoiding visual clutter, we have considered only the price in the month of May every year. In fact, petrol prices change frequently, sometimes several times a month due to fluctuations in crude oil prices.

Also, the central excise duty has been hiked more than once during some years. Thus, the chart below does not capture every price point over the last eight years but is still a good representative of the overall trend.

Figure 3

Source: Petroleum Planning and Analysis Cell

Now let’s try and understand this in detail. A look at the above chart tells us very clearly, the central government taxes on petrol have gone up over the years, from Rs 10.39 per litre in May 2014 to Rs 32.90 per litre in May 2021. This is a jump of around 217%. The state government value added tax in Delhi has also gone up from Rs 11.90 per litre to Rs 21.81 per litre, a jump of around 83%.

Clearly, taxes on petrol, more at the central government level than the level of state governments, have gone up over the years, and this has pushed up the retail selling price. Take a look at Figure 4 and Figure 5. They plot the proportion of each component in the retail selling price of petrol and diesel in May 2014 and May 2021, respectively.

Figure 4


Source: Petroleum Planning and Analysis Cell

Figure 5


Source: Petroleum Planning and Analysis Cell

As can be seen from Figure 4 and Figure 5, the price charged to the dealer, which was 66% of the retail selling price of Rs 71.41 per litre in May 2014, has since fallen to around 38% of the retail selling price of Rs 94.49 per litre in May 2021.

The central excise duty as a part of the retail selling price of petrol has jumped from 14.5% to 34.8%. This shows again that the increase in central excise duty has been a major reason for the increase in the price of petrol over the years. The increase in state government taxes have also played their role.

In fact, the dealer price of petrol in May 2014 was Rs 47.12 per litre in comparison to Rs 35.99 per litre in May 2021. Despite this, the retail selling price of petrol in May 2014 was at Rs 71.41 per litre, which was significantly lower than Rs 94.49 per litre in May 2021.

All that is true for petrol is also true for diesel. Figure 6 plots the price breakdown for diesel over the years. As can be clearly seen, the central government tax has gone up from Rs 4.50 per litre in May 2014 to Rs 31.80 per litre in May 2021, a jump of around 607%.

Meanwhile, the state government tax has almost doubled from Rs 6.61 per litre to Rs 12.50 per litre. When it comes to the dealer price for diesel, it was at Rs 44.98 per litre in May 2014 and at Rs 38.49 per litre in May 2021. Despite this, the retail selling price of diesel in May 2014 was at Rs 57.28 per litre, which was significantly lower than Rs 85.38 per litre in May 2021.

Figure 6


Source: Petroleum Planning and Analysis Cell

Let’s take a look at some interesting insights that emerge from the data above:

1) The price paid to the dealer was the highest in 2014. Since then, the dealer prices have come down, although not in a linear fashion. This is primarily because the average price of the Indian basket of crude oil in May 2014 stood at $106.85 per barrel. The oil price has seen a largely downward trend since then.

2) There have been some ups and downs when it comes to the dealer price, with the lowest prices for both petrol and diesel recorded in 2020, when they were around half of the price in 2014. This was on account of the price of the Indian basket for crude falling to $30.61 per barrel during May 2020, the lowest in any May since May 2014. Compared to the lows of 2020, dealer prices have risen by over 60% which explains the recent price surge at the pump. As explained earlier, retail prices have also gone up due to a massive increase in the central excise duty on petrol and diesel by Rs 10 per litre and Rs 13 per litre, respectively, in early May 2020.

3) From 2014 to 2021, taxes imposed by the central government have increased by around 217% on petrol and around 607% on diesel. The bulk of these increases were over two periods – from 2014 to 2015, and from 2019 to 2020, either by co-incidence or by design, both these periods were immediately following Narendra Modi’s election victories.

4) The first round of hikes in central excise duty in 2014 was effectively done to capture the gains from the drop in crude oil prices. The average price of the Indian basket of crude oil in May 2014, the month in which Modi was elected the prime minister, had stood at $106.85 per barrel. By January 2016, it was down to $28.08 per barrel. Instead of passing on lower prices to the consumer, the government decided to bolster tax revenues when global oil prices fell. Thus, the end consumer did not see a price decrease from the fall in crude oil prices.

5) After that, from 2015 to 2019, the central government tinkered with the central excise duty with marginal increases or decreases to keep the retail price somewhat bounded. In fact, in October 2017 and October 2018, the excise rate on both petrol and diesel was cut by Rs 2/litre and Rs 1.50/litre, respectively, to counter the increasing oil prices. The 2019 general elections also likely influenced these cuts.

6) The next big hike in central excise was in early May 2020, again around the same time when global oil prices plummeted in the aftermath of the covid pandemic, when the duty on petrol was increased by Rs 10/litre and that on diesel by Rs 13/litre. The price of the Indian basket of crude averaged at $19.9 per barrel in April 2020. It has since risen to more than $70 per barrel. But with a rise in oil prices in 2021, the excise tax has not been reduced. Hence, a higher oil price and a higher excise duty have both contributed to the rise in pump prices of petrol and diesel.

7) The charts above are for Delhi. As explained earlier, each state has a different value added tax or sales tax when it comes to petrol and diesel and a slightly different trend over the last eight years. A detailed analysis of every state is outside the scope of this piece. Nevertheless, the broader point stays the same. A major reason for the increase in the retail selling price of petrol and diesel, and the fact that petrol is selling at more than Rs 100 per litre in many states, is because the central excise duty on petrol and diesel, has been increased majorly over the years. The increase in state government taxes have also had a small role to play.

Officials in both the central government and state governments know that the current petrol and diesel prices are placing a high burden on the end consumer. Both sense discontent brewing on this issue, which can ultimately cost at the ballots. So, both stand to gain, if taxes are cut and prices fall.

Crucially, both have the ability to reduce the retail price, by lowering their portion of the tax. But the way things are currently it seems that the state governments would prefer the central government reducing excise duty, and the central government would prefer the state governments reducing the sales tax or the value added tax.

Given that both sides are standing firm, the consumer has ended up teary-eyed. Also, as we have seen, the central government taxes on petrol and diesel have gone up significantly more than the state taxes. Clearly, the ball is in the central government’s court.

To add more intrigue to the petrol and diesel tax saga, there is one other thing to consider. A part of the central excise duty is shared with the states. This part is referred to as the divisible pool. Much of the increase in central excise since May 2014 has been in the form of surcharge and cess, which are not shared with the states. We have discussed this in detail in an earlier piece.

As of 2021, only Rs 1.40 of Rs 32.90 collected through the central excise duty on per litre of petrol, and only Rs 1.80 of the Rs 31.80 collected through the central excise on per litre of diesel, goes to the divisible pool.

Since the states get 42% of the revenue from the divisible pool, they end up getting 59 paisa per litre which is a mere 1.8% of excise duty collected by the central government on per litre of petrol.  For diesel, the states’ share comes to 76 paisa per litre amounting to 2.4% of the central excise duty per litre of diesel.

Given that the central government has employed such a strategy of actively undercutting states’ revenue from the central excise duty collections on petrol and diesel, it is a tad optimistic to expect the state governments to be enthusiastic about a coordinated approach, where both the central government and the state governments reduce the taxes they collect on sale of petrol and diesel at the same time.

Central government dependence   

In the last couple of years, the central government has become overly dependent on the central excise duty that it earns on the sale of petroleum products (primarily petrol and diesel). In 2014-15, the central government had earned Rs 99,068 crore from this. This jumped to Rs 2.23 lakh crore in 2019-20. It jumped to an all-time high of Rs 3.72 lakh crore in 2020-21.

This compensates for the massive fall in corporate tax or the income tax paid on corporate profit. This had stood at Rs 6.64 lakh crore in 2018-19. In 2020-21, it fell to Rs 4.57 lakh crore, a drop of about a third. This happened because in September 2019, the government reduced the base rate of corporate tax to 22%, from the earlier 30%. Hence, the collections of corporate taxes fell in 2020-21, despite the massive increase in profits of listed corporates during the year.

Over and above this, a badly designed and run Goods and Services Tax has not brought in the amount of taxes it was expected to. As the Fifteenth Finance Commission Report put it: “In terms of government finances, [GST] was expected to improve the overall tax-GDP ratio in the medium term and lead to higher Union [central government] transfers to States.” But that hasn’t happened. This can clearly be seen in Figure 7.

Figure 7


Source: Centre for Monitoring Indian Economy.

There is no free lunch in economics. The costs of a fall in corporate tax collections and weaker than expected GST collections, are being borne by everyone who buys petrol and diesel in a direct way. In an indirect way, we are paying for it in the form of higher inflation.

This is why the central government cannot reduce excise duty on petrol and diesel. Their finances have become too reliant on the revenue generated by the excise duty on petrol and diesel.

The economy was already on weak footing when Covid hit. The pandemic triggered a massive reduction of economic activity – one that is still on going, which has reduced tax inflow from other sources. The fact that corporate income tax was cut hasn’t helped either.

Additionally, there are more financial demands on the government than the past. The government needs money to finance pandemic-induced expenses like vaccine procurement and improving healthcare delivery. All this could have been easily done if corporate income tax rates hadn’t been cut or GST had been launched and run properly.

In such an environment of decreased income, the government is unable to wean itself off  taxes it earns from the sale of petrol and diesel. In many ways this dilemma is self-imposed since this government’s original sin was its economic mismanagement before the pandemic hit. You construct a house poorly and a storm hits. Now you are drenched due to a leaking roof. Is the storm the only one to blame?

Good policy, bad policy

As a thought experiment, say the central government reduces the central excise duty on petrol and diesel by Rs 10/litre. The immediate knock-on effect will be one of the following three scenarios. One, the government will have to scale back spending to make up for the loss in revenue. Two, the government will increase a different tax (as we said earlier there is no free lunch). Three, the government takes on a higher fiscal deficit (the difference between its annual expenditure and revenue).

Given this, the government has decided to continue with the high central excise duty on petrol and diesel. But is that the best option available?

High prices of petrol and diesel cause misgivings in a large section of the electorate, especially the middle class and the poor. That the Modi government is willing to risk this public sentiment speaks to their confidence in assuaging voters through other avenues. While it’s for the government to figure out its politics on this issue, the economics of the decision though, can be debated.

As always, the economic argument on general topic of taxation of petrol and diesel is nuanced.  An increase in taxes on petrol and diesel (such as the central excise) has two negative economic impacts.

One, this leads to a higher inflation. Most goods need to be transported from where they are produced to where they are consumed, and the primary mode of transport of goods in India are trucks that run on diesel. So, when diesel prices go up, due to higher taxes or otherwise, price of most goods also increase. Inflation has its impact on consumption and that in turn slows down economic growth.

Two, a higher tax on petrol and diesel, is the opposite of a consumer stimulus i.e., it takes money out of people’s pockets. Higher fuel costs mean lesser disposable funds for other purchases, which then depresses demand for goods and services.  

One criticism of India’s economic response to the covid pandemic has been that most of the government actions have been directed towards suppliers and firms, instead of the consumers. Most developed nations have put money directly in the hands of citizens  to revive consumer demand.

Whether India’s fiscal situation allows for a meaningful stimulus is debatable, but surely a negative stimulus (which is what the higher central excise duty on petrol and diesel works out to), cannot help with the economic revival.

Given that the government has been addicted to taxes it earns from petrol and diesel, for more than a few years now, it has gone slow on disinvestment of its stakes in public sector companies as well as the land owned by them. The revenue that could potentially come in from here, could reduce the dependence on taxes coming in from the retail sale of petrol and diesel. But that hasn’t happened.

On the flip side, there is an argument in favour of higher taxes on petrol and diesel, related to environmental impact. Given the negative impact of fossil fuels on carbon emissions and global warming, higher taxes on petrol and diesel could/should in theory dampen their demand. However, in India, this line of reasoning is not very convincing.

Figure 8 shows the annual consumption of demand of petrol and diesel.

Figure 8

Source: Petroleum Planning and Analysis Cell

Other than 2020-21 which was affected by lockdowns and curfews, the demand for petrol and diesel has increased each year, despite changing prices. Moreover, diesel makes up for most of the fuel consumption, and it is particularly insensitive to price fluctuations since it is used for commercial transport and so the cost is passed on to the end consumer.

As RS Sharma, former chairman of ONGC said in 2018: “Demand for diesel is typically inelastic as most of the rise in price is borne by the end consumer and can be seen to directly impact inflation.”

Of course, one can’t rule out the possibility that if petrol and diesel prices had not increased due to a higher central excise duty, the demand would have grown even more. One cannot even quantify how the increased prices may incentivise adoption of alternative sources of energy, electric vehicles and such.

The trade-off between economic development and environmental stewardship is the ultimate dharamsankat of our times and taxes on petrol and diesel do lie in that realm. But we doubt that is on Sitharaman’s mind.

PS: This article can become the WhatsApp forward to beat all WhatsApp forwards. So, what are you waiting for? Press the share button.

Of Government Taxes, Bitcoin and the Fiction of Money

Anything can be money if individuals on both sides of the economic transaction are ready to accept it as money. As Yuval Noah Harari writes in Sapiens – A Brief History of Humankind: “Money is anything that people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services.” Of course, for something to emerge as a form of money at a societal level, it needs to be widely accepted.

This is the hope that the believers in bitcoin and other cryptocurrencies have been peddling for a while to make them look like attractive investments. That one day when enough number of people across the world are tired with the government backed fiat money or paper money as it more popularly known, cryptos will take over.

Of course, you can’t wait for that to happen, and you need to buy bitcoin now. This is one of the ways in which the fear of missing out or FOMO, is created.

So how logical is this argument? How much should we trust it? These are questions well worth asking.

If you look at the history of money, different things have been money at different points of time. In the prisoner-of-war camps of the Second World War, cigarettes emerged as a form of money. They are a great example of the fact that anything can be money if both the sides of the economic transaction are willing to accept so. Also, any system where conventional money is not around, like in a prison, does not continue to stay in a vacuum, and newer forms of money emerge.

Different agriculture commodities including tobacco have been money at different points of time. So have been different metals, everything from iron and bronze to silver and gold.

Hence, different things have been money at different points of time, during the course of human history. What this tells us is that as long as enough people accept something as a form of money, it can continue functioning as money, until it doesn’t.

This means that bitcoin and cryptocurrencies can also become a form of money, over a period of time. Nevertheless, if we leave it at just this, it will be lazy reasoning at best. Also, this is where things get a tad complicated.

Allow me to explain.

Pure paper money or fiat money or money not backed by any commodity (gold, silver, tobacco, iron, copper etc.) has been around for many centuries, nevertheless, it has flourished and been widely accepted only in the last hundred years.

Why is that the case? Why do people happily and readily accept money not backed by any commodity as a form of payment, on most days?

As L Randall Wray writes in Modern Money Theory:

“The typical answer provided in textbooks is that you will accept your national currency because you know others will accept it. In other words, it is accepted because it is accepted. The typical explanation thus relies on an “infinite regress”: John accepts it because he thinks Mary will accept it, and she accepts it because she thinks Walmart will probably take it.”

To put it a tad simplistically, paper money is accepted because paper money is accepted. Are we saying there is a mass delusion at work? Is fiat money fiction?

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

“Money is a made-up thing, a shared fiction. Money is fundamentally, unalterably unalterably social. The social part of money—the “shared” in “shared fiction”—is exactly what makes it money. Otherwise, it’s just a chunk of metal, or a piece of paper, or, in the case of most money today, just a number stored on a bank’s computers.”

Now that maybe true, but that’s not important. What is important is to understand what keeps this shared fiction, this mass delusion, this myth, or whatever else you might want to call it, going. And this is where the government, which issues fiat money and controls the fiat money system, comes in.

For the government, it is important that its citizens continue to believe in the shared fiction of fiat money and continue accepting it as a form of payment. What keeps it going? Before answering this question, it is important to understand that there are three things that make a government a government: a) The right to tax. b) The right to legal violence. c) The right to create money out of thin air.

Two out of three rights are important to the context of bitcoin and cryptocurrencies. The right to tax and the right to create money out of thin air. In the past, I have talked extensively about the fact that any government letting bitcoin and cryptocurrencies operate smoothly is essentially giving away its right to create money out of thin air. And they aren’t exactly waiting to do it. (You can read about this here, here and here).

So, what about the right to tax that any government has?

As Wray writes:

“One of the most important powers claimed by sovereign government is the authority to levy and collect taxes (and other payments made to government, including fees and fines). Tax obligations are levied in the  national money of account: Dollars in the United States, Canada, and Australia; Yen in Japan; Yuan in China; and Pesos in Mexico. Further, the sovereign government also determines what can be delivered to satisfy the tax obligation. In most developed nations, it is the government’s own currency that is accepted in payment of taxes.”

And not just in developed nations, even in lesser developed ones, the governments accept tax payments in the fiat money of the country. This is what keeps the fiat money system going. As Wray writes: “It is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations. The government cannot easily force others to use its currency in private payments, or to hoard it in piggybanks, but government can force use of currency to meet the tax obligations that it imposes.”

In simple terms, government taxes can only be paid in fiat money and that creates demand for fiat money or paper money not backed by anything, and keeps the system going.

A counter argument to this might be that while this might be true in countries where taxes form a significant part of the economy, but how does it work in countries where taxes are not a significant part of the economy. Why does the paper money system still hold?

The answer lies in the overall structure. Companies which operate in a country need to pay taxes to the government in fiat money. So, they carry out their business in fiat money; accept and make payments in it. This means their employees, suppliers (their employees), contractors (their employees), distributors (their employees) and so on, everyone gets paid in or must pay in paper money as well.

When people who are a part of the overall business system, which needs to pay different kinds of taxes, get paid in paper money, they go out and spend that paper money. Hence, individuals and institutions who sell to these people, must then accept paper money. So, the cycle keeps going. And there is demand for paper money or fiat money.

Also, it is worth mentioning here that taxes form a significant part of the economy in any developed country in the world. For any monetary revolution to happen, the governments in these countries need to buy the idea of bitcoin and other cryptos, and also actively promote them. El Salvador classifying bitcoin in a legal tender isn’t going to help that cause. Or the fact that Nigerians have taken on to bitcoin like no one else. These are exceptions to the rule.

The larger point here is that the structure of fiat money being needed to pay government taxes, keeps the paper money system going and will continue to keep it going in the time to come. The demand for fiat money will remain. As long as that is the case, bitcoin and other cryptos will be a sideshow at best, keeping the believers interested, at least for a while.  

Also, governments are not going to give up on their right to create money out of thin air. This explains why money central banks are now in the process of planning and/or launching their respective central bank digital currencies.

Of course, people who do not like to pay their fair share of taxes also do not like the idea of being a part of the formal financial system (which is what fiat money system on its whole is at the end of the day). Therefore, people who are a part of the black economy like to convert their profits on which they haven’t paid cash, into other assets like real estate (held benami), gold (easy to store), precious stones (easy to move around) etc. It also explains why people operating in the black illegal economy love bitcoin and other new forms of crypto.

On the flip side, those who run the fiat money system have been abusing it post 2008, when the financial crisis broke out, and post late 2019, when the world was hit by the Covid pandemic.

A lot of fiat money has been created out of thin air, to get economic activity and economic growth going again. This is offered as a major reason by crypto believers, as to why the world should be shunning paper money and buying bitcoin and other cryptos. There is a lot of paper money being created out of thin air, but only 21 million bitcoin are only ever going to be mined.

Hence, the cryptosystem is built around the concept of scarcity whereas with more and more paper money being created, high inflation can become the order of the day and wealth stored in fiat money can lose value at a very fast pace.

The trouble with this argument is that while more bitcoin cannot be created, anyone and everyone, who understands these things, can create a new cryptocurrency. Which is why there are thousands of cryptos going around. As renowned investor Ray Dalio put it in a note on bitcoin: “Competition will, play a role in determining bitcoin and other cryptocurrency prices. In fact, I assume that better ones will come along and displace this one because that is the way the evolution of everything works.” Given this, in the years to come, gold will still be around, about bitcoin, we really don’t know.

So, the point is you don’t know which crypto is going to be around in the days to come. And given that, how do can you ensure that the value of your wealth remains the same, by investing in crypto. Plus, at the risk of sounding cliched, the price volatility of cryptos continues to remain a huge risk.

Something which falls by 50% in a matter of months, cannot even aim to be an asset class, forget being a form of money. The crypto believers now offer the example of stablecoins, which are basically cryptos pegged to paper or fiat money. They have price stability. But their stability comes from being linked to fiat money in the first place. 

As Mark Carney writes in Value(s) — Building a Better World For All: “The highest-profile examples of stablecoins… are best thought of as payments systems rather than money per se since they derive their moneyness from the underlying sovereign currencies.”

To conclude, a small story. Before the crypto crash happened, a gentleman on Twitter very confidently told me that he would rather buy dogecoin, which was launched as a joke on bitcoin, than the US dollar. This is because the dogecoin wasn’t being created out of thin air (which is not true, given that the amount of dogecoin goes up every year, but we will ignore that here) and the dollar was.

His point was that the US dollar was not backed by anything. The US dollar is not backed by anything in the physical sense of the term, but it is backed by the US sovereign, the biggest economy in the world, perhaps the most innovative economy in the world and the biggest empire the world has ever seen. Also, the dollar has an exorbitant privilege. While other countries need to earn it, the US can simply print it. Which explains why the demand of for the dollar continues to remain solid, despite its abuse.

Yes, to that extent, it is not backed by anything and bitcoin and other cryptos are backed by everything.

What I can’t get my head around is that if you can’t trust the government (and there are reasons not to), how can you trust a few random guys launching their own crypto in their own backyard. Something which can be moved up and down by a few tweets. How is this fiction better than the government’s fiction? I really don’t have an answer for that.

On Being Positive – Do You Have Your Bullshit Receptors On?

Be positive.

My friends have told me to be positive.

My extended family has asked me to be positive.

Unknown people on the social media have suggested the same.

Because in their heads they feel that being positive will drive us out of the rut and all the troubles that we currently find ourselves in.

Of course, it’s not as simple as that. It never is. 

Dear Reader, have you ever wondered why the be positive messages started going around on WhatsApp, Twitter, Instagram, LinkedIn and what not, last month, right in the middle of the worst phase of the second wave of the covid pandemic? People were dying. People were not getting oxygen, beds or medicines for that matter, and in the middle of all this man made chaos, friends and family, were sending WhatsApp messages promoting the idea of being positive. 

Well, if you are like the people who have been asking me and others to be positive, you clearly didn’t think about it. This is simply because you were busy being positive and didn’t bother to figure out why this bullshit of being positive came up right when it did and not before or after.

The Nobel Prize winning psychologist Daniel Kahneman along with Olivier Sibony and Cass Sunstein, have got a possible answer for this in the book Noise—A Flaw in Human Judgement.

As they write:

“Sure enough, some people are more receptive than others to bullshit. They can be impressed by “seemingly impressive assertions that are presented as true and meaningful but are actually vacuous.””

The word vacuous means empty or mindless. From religious gurus to corporate gurus to religious gurus morphing as corporate gurus (yes there is a category like that as well), follow this formula with great success. Doing this involves use of phrases and sentences which sound profound when heard, but mean nothing, if you sit and think about it.

As Kahneman, Sibony and Sunstein write:

“Gordon Pennycook and colleagues have conducted many studies of people’s reactions to meaningless, pseudo-profound statements generated by assembling randomly selected nouns and verbs from the sayings of popular gurus into grammatically correct sentences, such as “Wholeness quiets infinite phenomena” or “Hidden meaning transforms unparalleled abstract beauty.” The propensity to agree with such statements is a trait known as bullshit receptivity.”

In order to make the population at large receptive of bullshit, it is important that they are in a good mood. While  doing this would have been very difficult earlier, now with cheap internet and rock-bottom mobile phone rates, and many smart phones going around, people can be bombarded endlessly with messages of being positive. It doesn’t cost anything except a few message writers, who are available dime a dozen.

As the authors point out:

“Inducing good moods makes people more receptive to bullshit and more gullible in general; they are less apt to detect deception or identify misleading information.”

And this is where the entire idea of being positive which has been promoted so extensively over the last one month, comes in.

The idea is to make sure that people are in a good mood and hence, more receptive to misleading explanations around why there is shortage of vaccines, why the government was caught totally unprepared for the second wave and why the government is not be blamed for all this. And it needs to be given the benefit of doubt.

Recently I was told by someone that the vaccine shortage is primarily because of journalists (yes, journalists). They wrote columns questioning the efficacy of the vaccines. This led to a situation where many people did not vaccinate between January and March, before the second wave broke out, as they thought the vaccines are not safe.

Given that enough people were not getting themselves vaccinated, the government ended up exporting six crore doses. Hence, now there is a shortage, and the government can’t be blamed for it, because journalists questioned vaccine efficacy. This is one argument going around among the be positive crowd.

There are many ways of puncturing this argument but let me use the simplest one. The current government has no interest in listening to journalists or anyone else who does not conform to their way of things. So why would they listen to them on just this issue? The more important question is why the government did not bother to order enough vaccines in advance, like governments of so many countries did.

The government didn’t do this simply because it got caught in its own rhetoric of India having successfully beaten the covid pandemic. The trouble with government propaganda is that sometimes the governments end up believing in it and the citizens have to bear its cost, which they currently clearly are, though many of them are busy being positive. 

It is important to keep in mind what Carl Bergstrom and Jevin West write in Calling Bullshit – The Art of Scepticism in a Data Driven World:

“Human language is immensely expressive, in the sense that we can combine words in a vast number of ways to convey different ideas… This is a good skill to have when trying to communicate efficiently—and it’s equally useful when using communication to manipulate another person’s beliefs or actions. That’s the thing about communication. It’s a two-edged sword.”

The entire be positive campaign (can’t think of a better word to describe it), is what the American philosopher Harry Frankfurt called a deliberate misrepresentation in his book On Bullshit.  And this deliberate misrepresentation has been carried out to ensure that there are no scratches on the teflon coating surrounding the government. 

To conclude, be positive in 2021 is basically what acche din aane waale hain was in 2014. They are two sides of the same coin. They were both designed to mislead.