How RBI Generated a ₹ 99,122 Crore Surplus for the Government

On May 21, the central board of directors of the Reserve Bank of India (RBI) approved the transfer of Rs 99,122 crore as surplus to the central government for the accounting period of nine months ending March 31, 2021 (July 2020-March 2021). 

This transfer to the government has raised a few issues. Let’s look at them point wise. But before we do that, I want to make a disclaimer here. This is a complicated topic and to make sure that I am able to explain it in simple English, I have left out a few details. At the cost of repetition, the idea is to explain the issues at hand, than get all the details right. So, to everyone who understands this inside out, apologies in advance.

Here we go. 

1) The RBI’s accounting year was from July to June, different from the April to March period that the central government follows. From 2021-22 onwards, the accounting year of the RBI will be the same as that of the government. Given this, the last accounting year of the RBI was for the period of nine months from July 2020 to March 2021, as it moved to the government’s accounting year.

Despite this shortening in the accounting year, the RBI surplus to the government has jumped big time. The surplus transferred to the government from July 2019 to June 2020, had stood at Rs 57,128 crore, for a period of full 12 months. Clearly, there has been a huge jump in the surplus transferred to the government, once we consider the fact that the last accounting year of the RBI was just nine months long.

2) The annual budget of the central government presented by the finance minister Nirmala Sitharaman on February 1, had assumed that the central government would earn Rs 53,511 crore as way of dividend/surplus from the RBI, the nationalised banks and the financial institutions (read the Life Insurance Corporation of India). A few months later, the surplus transferred just by RBI is much more than Rs 53,511 crore. So what gives?

3) Let’s first try and understand how the RBI managed to generate such a huge surplus, which was unexpected (or at least not made public) up until the budget was presented earlier this year. From July 2020 to March 2021, the RBI gross sold a total of $85.2 billion of its foreign exchange.

An accounting change made in 2019, thanks to the Bimal Jalan Committee report, now allows the RBI to pass a part of the profit made from selling foreign exchange, to the government as a surplus. The earlier system was different (for the sake of simplicity we won’t go there).

There is a certain weighted average price at which RBI has bought these dollars over the years. The RBI doesn’t reveal this detail. As per Ananth Narayan, Senior India Analyst at the Observatory Group, this weighted average stood at Rs 55.70, from July 2019 to June 2020.

It would be fair to say the weighted average would be a little higher in the last accounting year, more towards Rs 58-60 to a dollar. The RBI would have sold these dollars, from July 2020 to March 2021, at Rs 72-75 to a dollar, and thus made a profit of around Rs 15 for every dollar sold.

A part of this profit has been passed on to the central government as a surplus. So far so good.

4) While at the aggregate level, everything looks fine, if we start to look at the detailed data, this doesn’t pass the basic smell test. Take a look at the following graph, which basically plots the total gross dollars sold by the RBI every month from July 2020 to March 2021.

Source: Centre for Monitoring Indian Economy. 

The above chart makes for a very interesting reading. Close to 60% of the dollars sold during  the accounting year were sold in the last two months ($50.5 billion of the total $85.2 billion). More than 77% of the dollars sold during the year were sold in the last three months ($65.9 billion of the total $85.2 billion). 

What does this tell us? It tells us that the RBI sold a lot of dollars after the finance minister had presented the budget. And a good chunk of the surplus given to the government was probably thus generated. If I was a gossip columnist, I would have definitely speculated, whether one of the secretaries in the FinMin dialled RBI for more money, around the time the budget was presented.

5) As mentioned earlier, the facts stated above don’t pass the basic smell test. The RBI at various points of time needs to sell dollars in order to manage the dollar rupee exchange rate. While the RBI sold $65.9 billion from January to March, it also bought $61.8 billion during the same period. On the whole, this wouldn’t have made much of a difference in moving the foreign exchange market in a particular direction, when it comes to dollar rupee exchange rate.

Take a look at the following chart, which plots the dollar rupee exchange rate from January 2021 to March 2021.

Source: Yahoo Finance.

As can be seen from the above chart, the dollar rupee exchange rate moved within a narrow  range of Rs 72.4-73.6, for the first three months of 2021.

So what does this really mean? The RBI sold lots of dollars after the finance minister’s budget speech, not because that was what was required in the foreign exchange market, but in order to generate an accounting surplus for a cash-starved government. If I were to put it in very simple terms, the RBI led by Shaktikanta Das, resorted to jugaad.

6) The way things stand the RBI is not allowed to directly finance the expenditure by printing money and handing it over to the government to spend. Hence, over the last couple of years, it has been resorting to different ways to do so. Selling and buying dollars in order to generate an accounting profit is one such way. 

If I were to be slightly flippant here I would ask a rhetorical question – Is RBI a central bank or is it a government sponsored hedge fund?

Another way of financing the government has been printing money and buying existing government bonds from banks and other financial institutions.

While this move does not hand over money to the government directly, it does ensure that the supply of money in the financial system goes up, and the newly created money can be used by banks and financial institutions to buy fresh government bonds. Hence, this is indirect monetisaton of the government’s fiscal deficit or the difference between what it earns and what it spends.

To conclude, while nothing can stop a central bank from printing money, the tactic of selling dollars in order to generate a profit depends on how much the rupee depreciates against the dollar. While the weighted average cost of the dollars that the RBI currently has, is less than Rs 60 to a dollar, it will only rise in the years to come.

Hence, for enough profit to be generated through this route, the rupee needs to depreciate against the dollar. But that’s where atma nirbharta will come in and limit the RBI’s hand. Strong nations have strong currencies, at least that’s the idea in the heads of the politicians who run the current government.

But How Do You Hide the Dead…

The idea for this piece came from a May 13 tweet by G Raghuram. In this tweet Raghuram talked about the Goodhart’s law in the context of the way Covid numbers are being reported.

In a 1975 article, the British economist Charles Goodhart had stated: “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” This came to be known as the Goodhart’s law. Of course, like many other laws in economics, the Goodhart’s law has also not been stated in simple English.

As Carl T Bergstrom and Jevin D West write in Calling Bullshit—The Art of Scepticism in a Data-Driven World: “While Goodhart’s original formulation is a bit opaque, anthropologist Marilyn Strathern rephrased it clearly and concisely: When a measure becomes a target, it ceases to be a good measure.”

As Bergstrom and West further explain: “If sufficient rewards are attached to some measure, people will find ways to increase their scores one way or another, and in doing so will undercut the value of the measure for assessing what it was originally designed to assess.”

Examples of this phenomenon can be seen across different facets of life. A business school I used to work for had started dozens of journals and magazines, without much quality control, to drive up its rankings and it briefly did succeed. This was because business school rankings gave some weightage to research carried out by the faculty of a business school and by having its own magazines and journals, it was easier to publish. This helped in driving up the ranking. 

Now what does the Goodhart’s law have to do with the covid pandemic? As the covid pandemic struck and spread, different measures have been used to get an idea of its strength (for the lack of a better term). These include daily increase in covid cases, the total number of tests carried out in a district and a state, the total number of covid deaths, etc.

As per Goodhart’s law, these different measures have become targets. And that has led to different state governments  trying to game these measures, in order to make themselves look good and tell the world at large that they have the covid pandemic under control.

Before I get into data and news reports, let me explain this through a very simple example. For a while, the daily increase in the number of covid cases in Nagpur in Maharashtra was much more than the increase in the entire state of Madhya Pradesh.

Anyone who knows Indian geography would know that Nagpur is right on the border that Maharashtra shares with Madhya Pradesh. It is not an island. People can move between the states. This anomaly wasn’t really explainable unless one looked at the Madhya Pradesh numbers from the lens of the Goodhart’s law.

One parameter that has been managed (or should I say fudged) by different states is the number of people dying of covid. The idea as I explained earlier is to tell the world at large that they have the situation under control. The trouble is that the governments may be able to manage the data, but they can’t always hide the dead bodies.

Crematoriums across the country have been working overtime. Public health expert Ashish Jha, offered a straightforward argument in a Twitter thread on May 9. As he wrote: “During [the] non-pandemic year 2019, about 27,000 Indians died on [a] typical day. Crematoriums handle that level of deaths every day. Additional 4,000 deaths won’t knock them off their feet. Crematoriums across the country [are] reporting 2-4X normal business.”

He further writes: “So best estimate [of] 55,000 to 80,000 people dying daily in India, If you assume baseline deaths of 25,000-30,000, Covid [is] likely causing additional 25,000 to 50,000 deaths daily, not 4,000.” As Anirban Mahapatra writes in Covid-19 – Separating Fact from Fiction: “During the pandemic many of these excess deaths are due to COVID-19.”

Many journalists and newspapers have found ways of going beyond the official numbers. Let’s take the case of Gujarat. The Divya Bhaskar newspaper has reported that the state has issued 1.23 lakh death certificates between March 1 and May 10 this year. It had issued around 58,000 death certificates during the same period last year. So, the number of deaths has more than doubled this year. As per Gujarat government’s data only 4,218 deaths happened due to covid during the period. This suggests massive underreporting. The Gujarat government has called this report inaccurate.

It would be unfair to suggest that this trend of underreporting covid deaths is prevalent only in Gujarat. An April 15 report on NDTV, during the early days of the second wave, said that for Lucknow, the “cumulative official covid death count released by the government in the last seven days is 124.” Nevertheless, as “per the records maintained by the city’s crematoriums, over 400 people who died because of the virus had been cremated,” during the period. The government explained away this difference by saying that those dying in neighbouring districts and states were also being cremated in the city.

A similar thing happened in Bhopal as well. Over a period of 13 days in April, the official covid death count stood at 41. Nevertheless, a survey carried out by The New York Times of the main covid-19 cremation and burial grounds in the city, revealed that more than 1,000 deaths had been handled under strict protocols. There was a similar newsreport on Kanpur as well.  

In fact, the Financial Times, collected news reports across seven districts and found that the number of covid victims who had been cremated are ten times larger than the official covid numbers in the same districts. (Click on the above link to look at the graph).

Of course, other than such news stories, there have been a spate of photographs and videos lately, showing bodies washing up and then later buried on the shores of the Ganga river, flowing through Uttar Pradesh and Bihar. A Dainik Bhaskar news report puts the number at more than 2,000 bodies, with Kanpur, Unnao, Ghazipur and Ballia being worst hit. (Those who can read Hindi, I suggest please read this report).  

Journalists have also been counting paid obituaries being published in newspapers, again suggesting a huge difference between the reported numbers and the actual state of things.

As Bhramar Mukherjee, an epidemiologist at the University of Michigan told the New York Times: “It’s a complete massacre of data… From all the modeling we’ve done, we believe the true number of deaths is two to five times what is being reported.”

As per the Institute for Health Metrics and Evaluation, which is based in Seattle, United States, the total covid deaths in India as of May 6, stood at 6.54 lakh, around three times the official figure.

There are several ways in which the undercounting happens. In Uttar Pradesh, in order to get admitted into a hospital, the patient required a reference letter from the Chief Medical Officer “who heads the Integrated Command and Control Centres set up by the government in all districts”. Due to this rule, patients were turned away from hospitals. And if such a patient died he or she wouldn’t be counted in the covid deaths.

A medical officer in Krishnagiri in Tamil Nadu told The Hindu: “We have been told orally in the meeting that only deaths within 10 days of admissions will be taken as covid-19 deaths.” MK Stalin, the new Tamil Nadu chief minister, has asked the state government officers not to fudge data.

The number of deaths also depends on how the counting is carried out. Take the case of West Bengal, where in May 2020, the “official’ coronavirus death toll… doubled in the five days since the state virtually shelved its Covid-19 death audit committee.”

Then there are cases where an individual dying of covid had not tested positive (hence, it was a case of a false negative). There are examples of such cases not being counted as well.

There are also cases of covid deaths being attributed to other health complications that individuals had when they got infected by the virus. These include diabetes, hypertension, cancer etc., which increase the risk of severe covid.  

A news report on published in July 2020, pointed out that in Vadodra “death audit committees attributed nearly 75% of deaths in covid-19 positive cases to other causes such as complications from diabetes or following organ transplants.”  All this is happening against the prevailing guidelines of the Indian Council of Medical Research.

People who die outside hospitals or on their way to one, aren’t counted in the covid deaths. Two thirds of registered deaths in India happen at home. In all around 86% of deaths in India are registered.

Even here there is a great deal of variation across states. In Bihar and Uttar Pradesh, only 34.6% and 60.8% of the deaths, respectively, are registered. As the disease spreads across rural Bihar and rural Uttar Pradesh, massive undercounting of both active covid cases and deaths, is happening.

The reluctance of politicians notwithstanding, the system itself is not geared up to count the dead, from covid or otherwise, in these states.

The biggest evidence of undercounting comes from the fact that the Prime Minister Narendra Modi recently said that the “states should be encouraged to report their numbers transparently without any pressure of high numbers showing adversely on their efforts”.

There are several reasons why the governments need to count the number of people dying because of covid, correctly.

First and foremost, people have a right to know what is happening in the country. It tells us clearly how the disease is progressing  and helps us prepare accordingly, mentally, physically and financially.

Second, as I have often said in the past, if we don’t recognise a problem how do we work towards solving and/or containing it. With regard to this, Bhupinder Singh Hooda, a former chief minister of Haryana, made an important point in a recent column in The Indian Express, where he said:

“The Union government is allocating oxygen on the basis of the severity of the second wave in the state. If the state government underreports the numbers or fudges the data, it will harm, rather than help, the state as it will get a lower allocation of oxygen and more deaths will follow.”

Third, counting covid death numbers as accurately as possible is important for the overall health security of the world. No herd immunity can be achieved if the disease keeps spreading across India.

Fourth, the correct data helps epidemiologists run their models properly and then make projections that should help policy.

It also needs to be said here that historically during a pandemic, data is not always accurately collected. As  Chinmay Tumbe writes in Age Of Pandemics (1817-1920):

“Death figures are collected on the basis of ‘registration’, which is a process that usually breaks down in a period of crisis, as observed by the health officials of those times. It leads to serious underestimation of the number of deaths, especially in poorer countries with weak data collection systems. In India, the Census of 1921 noted that due to ‘the complete breakdown of the reporting staff, the registration of vital statistics was in many cases suspended during the progress of the epidemic in 1918’.”

The mortality statistics of those who died in the pandemic that happened between 1918 and 1921, have been updated through various studies over the years.

Having said that, when it comes to data and data collection, things have improved by leaps and bounds over the last 100 years. Hence, even with the pandemic being on, data collection and management, needs to be carried out in a much better way.

Of course, all this is lost on a central government, which is primarily interested in narrative management. It is currently busy spreading the narrative that it had warned the states of a second wave.

But then it did nothing about it… Didn’t order enough vaccines… Didn’t make sure that there was enough stock of oxygen… Exported the vaccines being produced… Continued with the kumbh mela and the elections, both big super spreader events… And also told the world that India had managed to defeat covid.

In between all this we were also asked to bang utensils and eat dark chocolate. 

Only 3.78% of Adults Have Got Both Doses of the Vaccine

Honestly, I didn’t want to write this piece. But when a cabinet minister of the government of India uses basic maths to mislead, it didn’t leave me with much of an option.

Here’s what Dr Harsh Vardhan, who is the minister of health and family welfare and science and technology, tweeted earlier in the day today.

Regular readers would know how much I hate when people don’t know when to use percentages and when to use absolutes. Or the fact that they know and still do it, to mislead.

Harsh Vardhan’s tweet has multiple problems. Let’s look at it pointwise.

1)  The minister points out that the government of India has provided more than 18 crore vaccines free to states for vaccination. This is for vaccinating people who are 45 or more. So far so good. The thing is that India has the second largest population in the world. As per the World Bank it was at 136.64 crore in 2019, with China’s population being at 139.77 crore. With China’s population barely growing and ours continuing to grow, by now, we might be within the touching distance of China to become the country with the largest population in the world.

So, when it comes to things that need to be provided to all the population or a significant chunk of it, India is bound to be at the top. Also, vaccinating the population is not a race. It is the right thing to do.

2) Given this, it makes sense to look at what proportion of the population over the age of 18 has been fully vaccinated, meaning it has gotten both the doses of the vaccine. That’s a useful metric.

As I write this, the dashboard on the Co-Win website tells me that 3.56 crore individuals have taken both the doses. There are around 94.3 crore Indians who are aged 18 and above. This means that around 3.78% of the population (3.56 crore expressed as a percentage of 94.3 crore), for whom vaccines are available, has been vaccinated.

Yes, you read that right. Less than 4% of those age 18 or above, have got both the doses of the vaccine. Of course, this explains why Dr Harsh Vardhan’s tweet is an absolute number and not in percentage terms. This situation prevails nearly four months after the vaccination programme started.

That’s the real figure to look at simply because the aim of vaccination is to achieve herd immunity. As Ryan A Bourne defines herd immunity in Economics in One Virus as “a situation where enough people have immunity that any further outbreak of the virus fails to accelerate because there are too few individuals susceptible to infection.” Vaccinating a significant chunk of the population moves us towards the situation. And we are nowhere near that, the world’s largest vaccine drive notwithstanding. 

Data from the Financial Times, tells us that there are many nations in the world who have vaccinated a significant chunk of their population. This includes smaller nations like Israel and larger ones like United States. Very few countries where covid has spread as much as it has in India, have got a rate of vaccination as low as it is in the Indian case.

3) Also, what Dr Harsh Vardhan’s tweet does not tell us is that the rate of vaccination has been slowing down majorly over the last one month. During the week April 3 to April 9, the total number of vaccinations carried out stood at around 2.48 crore doses (includes both the doses). This has fallen every week since then and stood at around 1.16 crore doses, during the week May 1 to May 7. This fall of over 53% has happened primarily because the government was busy with elections and didn’t order enough vaccines until April 28, 2021.

4) When it comes to receiving the first dose, 13.49 crore Indians or 14.3% of the population that is being vaccinated has got the vaccine. On this parameter things look a little better for India.

To conclude, vaccinating a significant chunk of India’s population to achieve herd immunity, remains a real challenge. Further, while everyone cannot be vaccinated within a short-period, but misleading the country on it by misrepresenting data is not going to help anyone in anyway. 

Of Money Printing and Covid Vaccines

I recently wrote a piece for, explaining why the central government should ensure that free vaccination against covid is available even for those in the 18-45 age bracket, and why the principles of free market do not work in this case.

In this piece, I carry the argument forward.

One of the arguments being made is that the companies making the vaccines should be allowed to price the vaccine at a price they deem to be appropriate because they need to be compensated for the risk that they are taking on.

In a normal situation, I would completely agree with that. But this is not a normal situation. We are in the midst of a health emergency of a kind India has not seen in a long time. Also, more than that, allowing companies to decide on the price of the vaccine is bad economics. (I had explained this in the livemint piece and I make a new point here). 

Let me explain. There are two companies which are supplying vaccines, Serum Institute and Bharat Biotech. They have access to the entire Indian market for the next few months, before the foreign competitors come along. Of this, Serum Institute has been supplying 90% of the vaccines up until now. Basically, it has more or less got a monopoly over the Indian market.

This is a very important point that needs to be taken into account. As per India Ratings and Research 84.19 crore out of a total population of 133.26 crore are now eligible for the vaccine, basically people over the age of 18. This is something that the central government needs to keep in mind.

Even if these companies made Rs 100-150 per dose of the vaccine, there is a lot of money to be made, running into thousands of crore, and that is an adequate compensation for the risk involved. Also, it is worth remembering that Serum Institute did not develop the vaccine. It is a contract manufacturer. These points cannot be ignored. 

Other than letting the vaccine companies decide on a price, the central government has also decided to let state governments procure vaccines directly from these companies. The price fixed for the state governments by the Serum Institute is Rs 400 per dose. Bharat Biotech has priced it at Rs 600 per dose.

For the private hospitals, the price has been fixed at Rs 600 per dose and Rs 1,200 per dose, respectively. Of course, these are wholesale prices, and the price eventually charged in the private hospitals, will be higher than this, as those entities need to take their costs of administering the vaccine into account and make a profit as well.

Over and above this, central government will continue to buy vaccines from these two companies and continue supplying them to state governments for free, so that those over the age of 45, can continue to be vaccinated for free, at government vaccination centres.

What will this do? Multiple price points for the vaccines in the midst of a health emergency is bad strategy to say the least. It will encourage black marketing, with black marketers sourcing vaccines from the cheapest source (central government supplying to state governments for free) and selling it for a higher price in the open market. This, especially at a time when there is a shortage of vaccines. 

Hence, it makes sense that central government continue to buy the vaccines from the manufacturers and allocate it to the state governments. This does not mean that the private hospitals should not be involved in the vaccination effort. They should be because the aim is to vaccinate as many people as fast as possible. 

But at the same time it needed to be ensured that the government vaccination centres vaccinated everyone for free, and not just those over 45. This would have ensured that the private hospitals could not have charged a very high amount to vaccinate. This would have keep prices in control and those who wanted to pay could have paid for the vaccine, as well. 

Many state governments have declared that they will vaccinate those in the 18-45 age group, for free. While this is a good move, it needs to be said that this is something that should have happened at the central government level. The central government has many more ways of raising money than a state government. Also, the central government had allocated Rs 35,000 crore towards vaccination in the budget, with a promise to raise the allocation if required. 

Over and above this, there is a more important point. But before I explain that. Let me deviate a little here and talk about an Irish-French economist called Richard Cantillon, who lived in the seventeenth century. Cantillon came up with something known as the Cantillon effect.

He made this observation based on all the gold and silver coming into Spain from what was then called the New World (now South America). When money supply increased in the form of gold and silver, it would first benefit the people associated with the mining industry, that is, the owners of the mines, the adventurers who went looking for gold and silver, the smelters, the refiners, and the workers at the gold and silver mines.

These individuals would end up with a greater amount of gold and silver, that is, money. They would spend this money and thus drive up the prices of meat, wine, wool, wheat, etc. Of course, everyone in the economy had to pay these higher prices.

How is this relevant in the world that we live in?

When central banks print money as they have been doing regularly since 2008, in order to drive down interest rates, they do so with the belief that money is neutral. So, in that sense, it does not really matter who is closer to this money being printed and who is not. But that’s not how it works.   

The Cantillon effect has played out since 2008. When central banks printed and pumped money into the financial system, the large institutional investors, were the ones closest to the money being printed.

They borrowed money at cheap rates and invested across large parts across the world, fuelling stock market and bond market rallies primarily, and a few real estate ones as well.

The larger point being that if a central bank prints money and throws it from a helicopter, those standing under the helicopter, get access to this money first. 

The important word here is access. With state governments and private hospitals being allowed to buy vaccines directly from the two companies, access becomes very important. When vaccination for those between 18-45 opens up on May 1, demand will go through the roof. But the supply will not go up at the same speed, with companies taking some time to scale up. So, how will the vaccine companies decide who to sell how much to?

Should they fulfil the demands of state X first or should they sell more to state Y? Or should they sell more to private hospitals, because the price is higher in that case. In this scenario, access becomes very important. This is the Cantillon effect of vaccines. The phones of the CEOs and the top management of these two companies won’t stop buzzing in the months to come. 

What will also happen is that many corporates will look to vaccinate their workforces (in fact, they already are), so that everyone can get back to work fast (Please remember everyone can’t work from home. India has large banks and many service businesses, in which people can’t work from home). In this scenario, private hospitals will have to decide whether they should vaccinate individuals or should they vaccinate corporate work forces, first.

Corporates might decide to pay a higher price for vaccination simply because it might be more profitable for them to have a vaccinated workforce going out there and doing their work, than not. 

The current structure of vaccination at multiple price points makes the issue of access to vaccination very important and that shouldn’t be the case. The central government shouldn’t be propagating inequality in access to vaccines.

Hence, the central government should have bought vaccines directly from the manufacturers and supplied it to the states.

Nevertheless, this is not going to happen simply because that would mean that the strategy of multiple price points was a mistake. And the government doesn’t make mistakes, especially even when it makes them.

Why the Price of Petrol is Racing Towards Rs 100 Per Litre

If there are two things that get people of this country interested in economics, they are the price of onion and the price of petrol racing towards Rs 100 per kg or litre, respectively.  Currently, the price of petrol is racing towards Rs 100 per litre in large parts of the country. In fact, in some parts, it has already crossed that level.

So, what’s happening here? Let’s take a look at this pointwise.

1) Take a look at the following chart, which plots the average price of the Indian basket of crude oil since January 2020.

Source: Petroleum Planning and Analysis Cell.
*February price as of February 18, 2021.

What does the above chart tell us? It tells us that as the covid pandemic spread, the price of oil fell, falling to a low of $19.90 per barrel in April 2020. It has been rising since then. One simple reason for this lies in the fact that as the global economy recovers, its energy needs will go up accordingly and hence, the price of oil is going up as well.

The other reason has been the massive amount of money that Western central banks have printed through the beginning of 2020. Oil, as it had post 2008, has emerged as a hard asset of investment for many institutional and high-networth investors, leading to an increase in its price. As of February 18, the price of the Indian basket of crude oil stood at $63.65 per barrel, having risen by close to 220% during the current financial year.

2) Now let’s look at the average price of the Indian basket of crude oil over the years.

Source: Petroleum Planning and Analysis Cell.
* Up to January 2021.

What does the above chart tell us? It tells us that the Narendra Modi government has been very lucky when it comes to the price of oil, with the oil price on the whole being much lower than it was between 2009 and 2014.

In May 2014, when Modi took over as the prime minister, the price of oil averaged at $106.85 per barrel. By January 2016, it had fallen to $28.08 per barrel.

Even after that, the price of oil hasn’t touched the high levels it did before 2014, in the post financial crisis years, which also happened to be the second term of the Manmohan Singh government.

A major reason for this lies in the discovery of shale oil in the United States. In fact, as Daniel Yergin writes in The New Map – Energy, Climate and the Clash of Nations: “In the autumn of 2018, though it was hardly noted at the time, something historic occurred: The United States overtook both Russia and Saudi Arabia to regain its rank as the world’s largest oil producer, a position it had lost more than four decades earlier.” This has been a major reason in the lower price of oil over a longer term.

The question that then crops up is why hasn’t petrol price in India seen low levels? The answer lies in the fact that between 2014 and 2021, the taxes on petrol, in particular central government taxes have gone up dramatically.

In short, the central government has captured a bulk of the fall in oil prices. Now when the oil price has gone up over the course of this financial year, the high-price of petrol has started to pinch.

3) Take a look at the following table. It plots the price of petrol in Delhi as of February 16, 2021 and in March 2014.


The above table makes for a very interesting reading. As of February 16, the price of petrol charged to dealers was Rs 32.1. Over and above this, the central government charged an excise duty of Rs 32.90 per litre on petrol. Add to this a dealer commission of Rs 3.68 per litre, and we are looking at a total of Rs 68.68 per litre.

On this the Delhi state government charged a value added tax of 30% or Rs 20.61 per litre. This leads to a retail price of petrol of Rs 89.29 per litre. Given that the state government charges a tax in percentage terms, the higher the price of petrol goes, the more tax the state government earns. The vice versa is also true.

Let’s compare this to how things were in March 2014. The price of petrol charged to dealers was Rs 47.13 per litre, much lower than it is today. On this, the central government’s tax amounted to Rs 10.38 per litre. The dealer commission was Rs 2 per litre.

Adding all of this up, we got a total of Rs 59.51 per litre. On this, the Delhi state government charged a value added tax of 20%, which amounted to Rs 11.9 per litre and a retail selling price of petrol of Rs 71.41 per litre. Interestingly, the state government’s tax was more than that of the central government at that point of time.

4) The above calculations explain almost everything. In March 2014, the price of petrol at the dealer level was higher than it is now, but the retail selling price was lower. Both the central government and the state government have raised taxes since then.

The total taxes as a percentage of dealer price now works out to 167% of the dealer price. In March 2014, they were at 47.3%. It is these high taxes which also explain why petrol prices in India are higher than in many other countries.

Of course, a bulk of this raise has come due to a rise in taxes charged by the central government. As mentioned earlier, the central government has captured a bulk of the fall in price of oil.

5) The calculation shown here will vary from state to state, depending on the value added tax or sales tax charged by the state government and the price at which petrol is sold to the dealers. States which charge a higher value added tax than Delhi will see the price of petrol reaching Rs 100 per litre faster than Delhi, if the price of oil continues to rise.

6) Of course, the governments can bring down the price of petrol by cutting taxes. In fact, four state governments have cut taxes providing some relief to oil consumers. But any substantial relief can be provided only by the central government. The trouble is that tax collections have fallen this year. Only the collection of excise duty has gone up by 54% to Rs 2.39 lakh crore, thanks to the higher excise duty charged on petrol and diesel.

The interesting thing is that the excise duty earned from the petroleum sector has jumped from Rs 99,068 crore in 2014-15 to Rs 2.23 lakh crore in 2019-20. The government has become addicted to easy revenue from taxing petrol and diesel. This year its earnings will be even higher than in 2019-20.

7) The central government also fears that if it cuts the excise duty on petrol and diesel, the state governments can step in and increase their value added tax, given that like the centre, they are also struggling to earn taxes this year.

Also, what needs to be kept in mind here is that the central government doesn’t share a good bit of what it earns through the excise duty on petrol and diesel with the states. This is because a bulk of the excise duty is charged in the form of a cess, which the central government does not need to share with the states.

Let’s take the overall excise duty of Rs 32.90 per litre of petrol currently. Of this, the basic excise duty is Rs 1.40 per litre and the special additional excise duty is at Rs 11 per litre. The road and infrastructure cess is at Rs 18 per litre (also referred to as additional excise duty) and the agriculture and infrastructure development cess is at Rs 2.50 litre. Clearly, the cess has a heavier weight in the overall excise duty.

8) One reason offered for the high price of petrol is low atmanirbharta or that as a country we have to import more and more oil than we did in the past. In 2011-12, the import dependency was 75.9%. This jumped to 77.6% in 2013-14 and has been rising since. In April to December 2020, this has jumped to 85%.

The explanation offered on this has been that oil companies haven’t carried out enough exploration activities in the past. Let’s take a look at the numbers of ONGC, the government’s biggest oil production company (or upstream oil company, as it is technically referred to).

The total amount of money spent by the company on digging exploratory wells in 2019-20 stood at Rs 4,330.6 crore. This had stood at Rs 11,687.2 crore in 2013-14. Over the years, the amount of money spent by ONGC on exploration has come down dramatically. This explains to some extent why the crude oil production in India has fallen from 37.8 million tonnes in 2013-14 to 30.5 million tonnes in 2019-20, leading to a higher import dependency.

Of course, not all exploration leads to discovery of oil, nevertheless, at the same time unless you explore, how do you find oil.

The reason why ONGC’s spending on exploration has fallen is primarily because the company has taken on a whole lot of debt over the past few years to finance the acquisition of HPCL and a majority stake in Gujarat State Petroleum Corporation’s (GSPC) KG Basin gas block. The money that ONGC borrowed to finance the purchase of HPCL from the government was used by the government to finance the fiscal deficit. Fiscal deficit is the difference between what a company earns and what it spends.

The borrowing has led to the finance costs of the company going up from Rs 0.4 crore in 2013-14 to Rs 2,823.7 crore in 2019-20. The cash reserves of the company are down to Rs 968.2 crore as of March 2020 from Rs 10,798.9 crore as of March 2014.

All this explains why the price of petrol is racing towards Rs 100 per litre. At the cost of sounding very very very cliched, there is no free lunch in economics. Somebody’s got to bear the cost.

It will be interesting to see if the central government continues to hold on to the high excise duty on petrol and diesel (whatever I have said for petrol applies for diesel as well, with a different set of numbers) leading to  a high petrol and diesel price and lets these high rates feed into inflation in the process.

Keep watching this space.