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.
Earlier in the day today, I published a detailed thread on the demand-supply scenario of the vaccines against covid, in India.
If you have read that thread, this piece is not for you. If you haven’t, do keep reading.
Up until today (April 30), vaccines against covid were only available for those aged 45 and above.
The number of people aged 45 and above in India is around 35.6 crore. This projection can be accessed from the Youth in India 2017 report. Of this, 12.4 crore individuals have taken only one dose of the vaccine and 2.6 crore have taken both the doses. (This number was as of the time of writing and keeps changing).
This basically means that 20.6 crore Indians (35.6 crore minus 12.4 crore, who have taken one dose, minus 2.6 crore, who have taken both the doses), aged 45 and above, are yet to take even a single dose of the vaccine.
In order to vaccinate them, the number of vaccines required will be 41.2 crore (20.6 crore multiplied by 2 doses each). Over and above this, 12.4 crore individuals who have taken just one dose, need to take a second dose as well.
Hence, the number of vaccines required, for those aged 45 and above stands at 53.6 crore (41.2 crore, who haven’t taken any dose, plus 12.4 crore, who have taken one dose).
From tomorrow (May 1), vaccination is open even for those aged 18 and above as well. As per the Youth in India report, the number of people in the age bracket 20-44, stands at around 55 crore. It doesn’t have a break up for the age bracket 18-44. So, it’s only fair to assume that the number of individuals in the age bracket 18-44, will be around 60 crore. In fact, that is the assumption I worked with in my Twitter thread.
One of the readers pointed out that economists Renuka Sane and Ajay Shah in a piece estimate that the number of individuals in the age group 18-44 stand at 62.2 crore. I will work with this number here. (I am trying to workout a ballpark estimate here and not write a research paper).
The number of vaccines required for those in the 18-44 bracket stands at 124.4 crore (62.2 crore multiplied by two doses). The overall number of vaccines required to vaccinate everyone aged 18 and above, is, 178 crore (124.4 crore plus 53.6 crore).
This is where things get interesting. In May, Serum Institute (Covishield) is expected to produce 7 crore vaccines. Bharat Biotech (Covaxin) is expected to produce 2 crore. That’s 9 crore vaccines, when 178 crore vaccines are required. If we take vaccine wastage into account we are looking at a number higher than 178 crore and closer to 190 crore vaccines.
Serum Institute’s capacity is expected to go up to 10 crore vaccines by June and Bharat Biotech’s capacity is expected to go up to 6 crore by July. By July we will have 16 crore vaccines being produced per month.
Of course, other vaccines like Sputnik and Pfizer will also come in, and thus the supply will increase and go up to more than 16 crore.
The point is that the supply of vaccines will continue to be a problem for the next few months. There are only two companies and there is only so much they can produce.
What does this tell us? It tells us that the authorities assumed that there will be no second wave and hence, had no plans to vaccinate a large section of the population quickly. The government has been caught napping at the wheels.
Also, even with the availability of 20 crore vaccines a month, it will take at least five to six months, for a significant portion of the population to be vaccinated, so that the population can achieve herd immunity.
One reader on Twitter told me that the capacity may also be used to fulfil commercial export commitments of the vaccine suppliers. I have no idea about whether that is the case. If that is the case, vaccination of a significant portion of the population will take even longer.
This easily explains why state governments are running out of stocks. The supply is very low in comparison to the demand. This is a problem that is not going to go away at least for the next two months. This is also explains, why even though vaccination for those over 18 is now allowed, there aren’t vaccines available to vaccinate them.
Of course, there will be a great fight for access to vaccines, not just between state governments, but also between state governments and the private sector. That is what the current vaccine strategy will lead to.
I have already heard stories of corporates throwing money to ensure that their employees are vaccinated and can get back to work quickly. For them, it is the cost of doing business, which can be easily passed on to their consumers. Of course, this evidence is anecdotal, but many corporates, especially those in the services business, have an incentive in doing so. If this plays out at a significant level, it will make vaccines even more inaccessible for the common man.
Basically, it’s a royal screwup, which cannot be corrected quickly. Give it another five to six months and hope for the best.
Meanwhile, don’t step out if you can, and if you do, stay doubled masked!
After Lehman Brothers, the fourth largest investment bank on Wall Street went bust in September 2008, the Federal Reserve of the United States, the American central bank, came up with three rounds of large-scale asset purchases (LSAP). The LSAP was popularly referred to as quantitative easing or QE.
Yesterday, Shaktikanta Das, the governor of the Reserve Bank of India (RBI) announced a similar sounding GSAP or G-sec acquisition programme, where G-sec stands for government securities. India now has its own planned QE. (At the risk of deviation, it’s not just the Indian film industry which copies the Americans, our central bank also does.)
The government of India issues financial securities known as government securities or government bonds, in order to finance its fiscal deficit or the difference between what it earns and what it spends. Banks, insurance companies, non-banking finance companies, mutual funds and other financial institutions, buy these securities. Some are mandated to do so, others do it out of their own free will.
What does GSAP entail? Like was the case with the Federal Reserve and the LSAP, the RBI will print money and buy government securities. For the first quarter of 2021-22 (April to June), the RBI has committed to buying government securities worth Rs 1 lakh crore. The first purchase under GSAP of Rs 25,000 crore will happen on April 15, later this month.
Why is this being done? Among other things, the RBI is also the debt manager for the central government. It manages government’s borrowing programme. After borrowing Rs 12.8 lakh crore in 2020-21, the government is expected to borrow another Rs 12.05 lakh crore in 2021-22. Due to the covid-pandemic and a general slowdown in tax revenues over the years, the government has had to borrow more in order to finance its expenditure and the fiscal deficit.
This information of the government having to borrow more than Rs 12 lakh crore again in 2021-22, came to light when the annual budget of the central government was presented on February 1. Due to this higher borrowing, the bond market immediately wanted a higher return from government securities.
The return (or yield to maturity as it is more popularly know) on 10-year government securities as of January 29, had stood at 5.95%. By February 22, the return had jumped to 6.2% or gone up by 25 basis points, in a matter of a few weeks. One basis point is one hundredth of a percentage.
The yield to maturity on a security is the annual return an investor can expect when he buys a security at a particular price, on a particular day and holds on to it till its maturity.
As the latest monetary policy report of the RBI released yesterday points out: “Yields spiked following the announcement of government borrowings of Rs12.05 lakh crore for 2021-22 and additional borrowing of Rs 80,000 crore for 2020-21.”
In May 2020, the government had announced that it would borrow a total of Rs 12 lakh crore in 2020-21. When the budget was presented, the government said that it would end up borrowing Rs 12.8 lakh crore or Rs 80,000 crore more.
At any given point of time, the financial system can only lend a given amount of money. When the demand for money goes up, it is but natural that the return expected by the lenders will also go up. This led to the bond market demanding a higher rate of return on government securities, pushing up the yields or returns on government securities.
How did this become a bother for the government? When the returns on existing government securities go up, the RBI has to offer higher rates of interest on the fresh financial securities that it plans to issue on behalf of the government to fund the fiscal deficit. This pushes up the interest bill of the government, which the government is trying to minimise.
Government securities are deemed to be the safest form of lending. Once returns on these securities go up, the interest rates in general across the economy tend to go up, which is not something that the RBI wants at this point of time. The hope is that lower interest rates will help the economy revive faster.
As the debt manager of the government, it’s the RBI’s job to offer the best possible deal to its main client. Hence, post the budget, the RBI got into the job quickly and to drive down returns on government securities launched an open market operation (OMO). As the monetary policy report points out: “Yields subsequently eased somewhat on the back of… the OMO purchases for an enhanced amount of Rs 20,000 crore on February 10, 2021.”
In an OMO, the RBI prints money and buys government securities from those institutions who are willing to sell them. The idea here is to pump more money into the financial system and in the process ensure that yields or returns on government securities go down.
With the GSAP, the RBI has just taken this idea forward. While the GSAP is not very different from the OMOs that the RBI carries out, it is more of an upfront commitment and clear communication from the RBI that it will do whatever it takes to ensure that yields on government securities don’t go up. Like between April and June, the RBI plans to print and pump Rs 1 lakh crore into the financial system.
Let me make a slight deviation here. In this case, the RBI is also indirectly financing the government’s fiscal deficit. As the debt manager for the government, the RBI sells fresh securities to raise money in order to help the government finance its fiscal deficit.
These securities are bought by various financial institutions. When they do this, they have handed over money to the RBI, which credits the government’s account with it. In the process, the financial institutions as a whole have that much lesser money to lend for the long-term.
By printing money and pumping it into the financial system, the RBI ensures that the money that financial institutions have available for lending for the long-term, doesn’t really go down or doesn’t go down as much,
Hence, in that sense, the RBI is actually indirectly financing the government borrowing. (It’s just buying older bonds and not newer ones directly). A reading of business press tells me that the bond market expects more money printing by the RBI during the course of the year. One particular estimate going around is that of more than Rs 3 lakh crore. In that sense, even if the RBI prints Rs 3 lakh crore, it will indirectly finance around a fourth of the government borrowing given that it is scheduled to borrow Rs 12.05 lakh crore in 2021-22.
Now getting back to the topic. Like in any OMO, while carrying out a GSAP operation, the RBI will print money and buy government securities. In the process, it will put money into the financial system. This will ensure that returns on government securities don’t go up. In the process, the government will end up borrowing at lower rates.
This is how the RBI plans to keeps its main customer happy. It needs to be mentioned here that with the second wave of covid spreading across the country, chances are economic recovery will take a backseat and the government will have trouble raising tax revenues like it did in 2020-21, the last financial year.
This might lead to increased borrowing on the government front. Increased borrowing without the RBI interfering will definitely lead to the bond market demanding higher returns from government securities. With the GSAP, the hope is that yields or returns on government securities will continue to remain low.
It is worth remembering that Shaktikanta Das’ three year term as the RBI Governor comes to an end later this year. Hence, at least until then, it makes sense for Das to keep Delhi happy.
Of course, the money printing leading to lower return on government securities, will also ensure that the interest you, dear reader, earn on your fixed deposits, will continue to remain low, and the real rate of interest after adjusting for the prevailing inflation, will largely be in negative territory.
As mentioned earlier, lending to the government is deemed to be the safest form of lending. And if that lending can be carried out at low rates, the other rates will also remain low. This is the cost of the RBI trying to help the government, the corporates and the individual borrowers. It comes at the cost of savers. This is interest that the savers would have otherwise earned.
It is as if the RBI is telling the savers, don’t have your money lying around in deposits. Chase a higher return. Buy stocks. Buy bitcoin.
If the RBI had let the interest rates find their own level, with the government borrowing more, the interest rates would have gone up and helped the savers earn a higher return on their deposits. This would have also encouraged consumption, especially among those individuals whose expenditure depends on interest income. The argument offered by economists over and over again is that lower interest rates lead to higher borrowing and faster economic recovery.
Let’s take a look at this in the case of bank lending to industry. As of February 2021, the total bank lending to industry stood Rs 27.86 lakh crore. As of February 2016, five years back, the total bank lending to industry had stood at Rs 27.45 lakh crore.
Over a period of five years, the net bank lending to industry has gone up by a minuscule Rs 40,731 crore or just 1.5%. Meanwhile, the interest rate on fresh rupee loans given by banks during the same period has fallen from 10.54% to 8.19%, a fall of 235 basis points.
So much for corporates borrowing more at lower interest rates. This is their revealed preference; the actions that they are taking and not the bullshit that they keep mouthing on TV and in the business media. Currently, the Indian corporate simply isn’t confident enough about the country’s economic future and that’s the reason for not borrowing and expanding, irrespective of the public posturing.
Anyway, the point is not that higher interest rates are required. But the point is that if the RBI did not intervene like it has been doing, by printing money and buying bonds, slightly higher interest rates which would put the real interest rate in positive territory, would have been the order of the day. And that would have been better than the prevailing situation. A little better for the savers about whom neither the RBI nor the government seems to be bothered about.
But then as I said earlier, the government is the RBI’s main customer these days. And that’s the long and the short of it.
Note: Detailed analysis takes time. Like this piece took three weeks to write. Hence, please continue supporting this effort. Every rupee helps.
Chintan Patel and Vivek Kaul
The devil, as they say, is always in the detail.
Nevertheless, in an era of instant digital journalism, where you, dear reader, are constantly bombarded with information, the real story, or should we say stories, often get buried under numerous headlines, lazy journalism, government press releases and the false news that is the flavour of the day.
But if one is willing to do some basic number-crunching, like we are, some interesting details and narratives can emerge.
This is one such story of the central government taking both the states and the common man, for a ride and that too in broad day light. At the risk of stretching the metaphor a bit too far, the scene of the crime is the petrol pump and the motive, the dire state of the economy.
But to do this story full justice, we need to set up the background with some dry, academic points as well as digress into some adjacent details.
So, kindly bear with us. While sensational things might get you excited and help us get a few more clicks, but as we said at the beginning, the devil is in the detail.
And here’s presenting the detail.
What’s the point?
Over the years, the central government has been sharing less and less of the overall taxes that it collects, with the state governments. This is the main point we make in this piece.
The annual budget of the central government is presented in February ever year. The budget is analysed by the media in minute detail.
However, amidst all the analyses, one subject that is often ignored is the financial relationship between the central government and the state governments. After all, much of the services that the government provides are in fact delivered by local and state governments.
It is worth remembering that while the central government collects the bulk of the taxes in the country, it’s the states that the taxes ultimately come from. And given that, this money in one way or another needs to go back to the states.
But does it? The short answer is no. And there is a longer answer which explains the reasons, has some nuance and which forms the heart of this piece.
This piece is divided into three sections. The first section provides a background on how tax revenue is transferred from the central government to the state governments and the role of the Finance Commission.
The second section focuses on a special tax category – cess and surcharge, their increased prominence in recent times, and how that raises prices of petrol and diesel.
The third and final section examines the trend of total transfer of funds from the central government to the state governments.
This is an opportune time for such an analysis, since this year’s Union budget was accompanied by the unveiling of the 15th Finance Commission’s report for the period 2021-22 to 2025-26.
So, read on, to find out.
Who Gets How Much?
The Constitution stipulates how taxes are collected and split between the central government and the state governments. It empowers the central government as well as the state governments to raise revenues from different sources of taxation.
The central government gets to collect more taxes while the state governments end up with the bigger portion of the expenditure, leading to a mismatch. This mismatch of money that is earned through taxes and other routes and money that needs to be spent, is referred to as a “vertical imbalance”.
Take a look at Figure 1. In 2018-19, the Union Government raised 62.7 per cent of the aggregate resources raised by both the Union and states, whereas the states spent 62.4 per cent of the combined aggregate expenditure. While Figure 1 shares data for just one financial year, what’s true for 2018-19 has also been true for other financial years.
Figure 1: Vertical imbalance (2018-19)
Source: 15th Finance Commission Report.
To offset this imbalance, the Constitution provides mechanisms for intergovernmental transfers – the transfer of funds from the central government to the state governments. A key player of this setup is the Finance Commission.
The Finance Commission (FC) is an advisory body that is appointed by the President every five years and which evaluates the state of finances of the central as well as the state governments, and determines how taxes collected by the central government are to be distributed between the central government and the state governments, and among the state governments.
Over and above this, the FC also recommends grants to states based on revenue needs, grants for local governments and grants for specific purposes e.g. health sector grants etc. Thus, there are two broad channels of transfer of funds under the FC umbrella – i) devolution of taxes, and ii) grants.
At the heart of the idea of intergovernmental transfers and tax devolution is the concept of ‘divisible pool’. The divisible pool is the portion of the taxes (technically referred to as the gross tax revenue) collected by the central government, which is distributed between it and the state governments. What this means is that all the taxes collected by the central government aren’t shareable with the state governments.
Till the tenth FC which tabled its report in 1995, only union excise duties and personal income taxes made up the divisible pool. Under this arrangement, 85% of the personal income taxes and 40-45% of excise duties were shared with the state governments.
In 2000, the tenth FC recommended a constitutional amendment to expand the divisible pool to all central taxes. The central government accepted this recommendation and the 80th Amendment was passed making a certain portion of central government taxes shareable with the state governments, effective retrospectively from April 1, 1996.
Further, the portion of the divisible pool that is shared with the states is referred to as the devolution of taxes and is determined by the FC. Before the14th FC which came into effect from April 2015, 32% of the divisible pool was shared with the states.
The 14th FC increased the share of the state governments in the divisible pool to 42%. At the same time, the sector-specific grants were eliminated. This decision was primarily in response to grievances expressed by the state governments. State governments prefer funding through devolution since such transfers are unconditional.
Other transfers of money, whether they are through FC grants, or through channels outside the FC (like schemes from central government ministries) impose policy priorities set by the central government over the state governments, compromising the latter’s fiscal flexibility or the ability to spend money as the state government deems fit.
To give an example, a FC health-sector grant can only be used for health spending by the states, or funds transferred to the states under Pradhan Mantri Gram Sadak Yojana can only be used to make roads.
When state governments have more flexibility in allocating funds for various initiatives, they can craft policy that is more responsive to the needs on the ground than having to blindly follow policy that is framed in New Delhi.
The 14th FC recognised this and increased the state share of the divisible pool from 32% to 42%. The intent behind this increase was not to increase the amount of transfers but rather change the composition of the transfers – from diverting conditional funds to diverting unconditional funds, to state governments.
The 15th FC tabled in 2021 lowered the divisible pool marginally to 41%, from the earlier 42%. The is because Jammu and Kashmir is no longer a state and the money allocated to it has not been counted as transfer to a state government. Given this, the 15th FC has kept the divisible pool distribution unchanged.
And now we come to the most important point of this write up. A key detail in this entire discussion is that the only tax revenue that is excluded from the shared divisible pool are different kinds of surcharges and cess.
As we shall see next, this exclusion has proved to be the back door that the central government has been using to divert funds from the states governments’ kitty to its own.
A Tale of Two Taxes
Before we get into the details, let’s first try and understand what surcharge and cess actually are.
A cess is tax on a tax imposed by the central government attached to a specific purpose. For example, an education cess collected should be utilised only for financing education and not for any other purpose. It is worth remembering here that the education cess is imposed on the total income tax and not on the total taxable income.
Hence, as explained earlier, it is a tax on a tax. Examples include infrastructure cess on petrol and diesel, krishi kalyan cess, health and education cess on Income Tax, etc.
In theory, money collected under a cess is to be spent on the specific purpose for which it is collected but that’s not always the case.
A Comptroller and Auditor General (CAG) report for 2018-19 indicates that only Rs 1.64 lakh crore of the Rs 2.74 lakh crore or around 60% of the amount collected from cess and surcharge during 2018-19 had been transferred to their respective funds. Around 40% was still retained in the Consolidated Fund of India, which is the general-purpose fund of the Indian government.
The provision of levying a cess was intended to be used for shorter specific purposes. So, the procedure for introducing a cess is comparatively simpler than introducing new taxes, which usually require change in the law.
Coming to surcharges, a surcharge is also a tax on a tax, but is not tied to a specific purpose like a cess is. Let’s take the example of the surcharge on income tax. It is an added tax on the taxpayers having a higher taxable income during a particular financial year. So, an individual having a taxable income between Rs 50 Lakhs and Rs 1 crore pays an income tax surcharge of 10%.
Further, an individual with a taxable income between Rs 1 crore and Rs 2 crore, pays an income tax surcharge of 15%, and so on.
Note that this surcharge is only on the base income tax, not on the income itself. So, if an individual earning Rs 1 crore in a year needs to pay an income tax of Rs 20 lakhs, the applicable surcharge would be Rs 2 lakhs (10% of 20 lakhs).
A surcharge can be utilised for any purpose of the government, without having to bend the rules, like they do sometimes for cess collections.
In the last few years, these surcharges and cess, which do not need to be shared with the state governments, have become the central government’s go-to tools to address the tax revenue shortfall.
Take a look at Figure 2a, which basically plots the total amount of surcharges and cess collected by the central government over the years, along with the surcharge and cess it hopes to collect during 2021-22, the current financial year.
Figure 2a: Total cess and surcharge revenue (in Rs crore).
Source: Union budget documents.
Figure 2a clearly shows that the general trend is upwards, with small blips in 2017-18 and 2018-19. The government expects to collect total surcharges and cess of Rs 4,45,822 crore (revised estimate) in 2020-21.
This is surprising given that overall tax collection during the year is expected to come down. In comparison to the years before 2020-21, the collections for 2021-22 are also expected to be at a very high Rs 4,48,821 crore.
The collections of cess and surcharge surged from Rs 2,53,540 crore in 2019-20 to Rs 4,48,822 crore (RE) in 2020-21, an increase of a whopping 77%. This huge increase is almost entirely due to increased cess and surcharge on petrol and diesel – in particular, the road and infrastructure cess and the additional duty of excise on motor spirit (which is a surcharge), which increased by Rs 1,92,792 crore. Motor spirit is the technical term for petrol.
The increased reliance on cess and surcharge is also seen in Figure 2b below, which plots the total cess and surcharge earned by the central government as a proportion of the Indian gross domestic product (GDP). This is done in order to take the size of the Indian economy into account as well.
Figure 2b: Cess and surcharge revenue expressed as a proportion of the GDP (in %).
Source: Union budget documents.
The above figure makes for very interesting reading. The total amount of cess and surcharges earned by the central government went up from 1.25% of the GDP in 2019-20 to 2.29% of the GDP in 2020-21, a massive jump of 104 basis points. Some of this jump was obviously because the size of the economy or the GDP is expected to contract in 2020-21. Nevertheless, the fact that cess and surcharges collected by the government went up in a year when the economy contracted, does come as a surprise.
In Figure 3, let us look at the breakdown between cess and surcharges earned by the central government over the years. Looking at the below figure it is evident that cess collections form the bulk of the total revenue.
Figure 3: Cess and surcharge breakdown (in Rs crore).
Source: Union budget documents.
Clearly, cess is bringing in more money for the central government, though the contribution of surcharges has also jumped up since 2019-20.
Now let’s try and understand, why has the central government increasingly become more dependent on earning money through cess and surcharges, and in the process it is sharing lesser proportion of taxes with the state governments.
This increased reliance on cess and surcharges in the last two years can be understood when one looks at what is happening with the total tax revenue. Figure 4 plots the total taxes earned by the central government or gross tax revenue as a proportion of the GDP.
Figure 4: Gross tax revenue as a proportion of GDP (in %).
Source: Union budget documents
While the negative economic impact of the covid pandemic has been a telling blow, the downward trajectory in tax collections of the central government had started as far as back as 2018-19. The twin economic debacles of PM Modi’s first term – demonetisation and a shaky GST implementation – meant the economy was already tottering before the covid pandemic hit.
An obvious casualty of this slowdown has been a declining tax revenue as a proportion of the GDP. In the normal scheme of things, this would have meant that the central government would have ended up with lesser taxes for itself, after sharing with the state governments.
But this fall has been cushioned with the central government earning a higher amount of taxes through cess and surcharges (as can be seen from Figure 5).
Figure 5: Cess and surcharge as a proportion of total central government taxes.
Source: Union budget Documents RE = Revised Estimate BE = Budget Estimate
In 2019-20, the total taxes earned by the government or the gross tax revenue had stood at Rs 20.1 lakh crore. In 2020-21, it is expected to fall by 5.5% to Rs 19 lakh crore. The net tax revenue of the central government (what remains after sharing taxes with the state governments) in 2019-20 was at Rs 13.59 lakh core.
This is expected to fall to Rs 13.45 lakh crore in 2020-21, a fall of 0.9%, which is much lower than the 5.5% fall in gross tax revenue. While, the total gross tax revenue is expected to fall by Rs 1.1 lakh crore (Rs 20.1 lakh crore minus Rs 19 lakh crore), the net tax revenue is expected to fall by just Rs 14,000 crore (Rs 13.59 lakh crore minus Rs 13.45 lakh crore).
In percentage terms, in 2019-20, the central government kept 67.6% of the taxes for itself in 2019-20. This shot up to 70.8% in 2020-21.
Clearly, the state governments have been short-changed here, with their share of taxes falling from Rs 6.51 lakh crore in 2019-20 to Rs 5.5 lakh crore in 2020-21, a fall of a little over Rs 1 lakh crore or 15.5%, in such economically difficult times.
This is primarily because the share of cess and surcharge in total taxes collected by the central government has jumped from 12.67% in 2019-20 to 23.46% in 2020-21. Do remember that cess and surcharges are outside the divisible pool.
So, when the inflow of these taxes increases, the central government gets to keep all the revenue, as opposed to sharing 41% (15th FC guideline) with the state governments. So, it is far more efficient for the central government to increase cess and surcharge when it needs to increase tax collection.
This overuse of cess and surcharges by the central government has not gone unnoticed. In fact, the chairman of the 15th FC, NK Singh has talked about introducing a constitutional amendment to include them in the divisible pool.
“I see no viable solution except a constitutional amendment. If that constitutional amendment is introduced, recognizing some proportion of cess and surcharge to the divisible pool, it will certainly allow greater flexibility to the successive Finance Commissions subsequently to be able to calibrate a framework.”
Ultimately, as we said at the very beginning, whatever might be the term used, a tax, or a cess or a surcharge for that matter, it is being paid by people. And hence, the money thus collected should be shared with the state governments.
How does all this affect you, dear reader?
If you have managed to make it thus far, many of you by now would be like how much gyan are these guys going to give. Why can’t they tell me straightaway how does all this impact me or the world at large or the aam aadmi?
Well, sometimes it is important to take a look at the bigger picture first and then arrive at how it impacts all of us.
The government’s increased reliance primarily on cess actually has had a direct impact on most citizens – in the form of increased prices at the petrol pump.
The biggest contributor to the spike in cess collection over the last two years has been cess collected on the sale of petroleum products. The figure below charts the total cess collected on petroleum products (crude oil, petrol and diesel) over the last five years. While the cess on petrol formed at least 50% of total cess each year, it was as high as 69% of the total cess revenue in financial years 2019-20 and 2020-21.
Figure 6 clearly shows that the government has resorted to taxing petrol and diesel to make up for revenue shortfalls. This conclusion is hardly a revelation to anyone paying attention to prices at the pump, but the numbers help understand the government’s motivation.
Figure 6: Total cess on petroleum products (in Rs crore).
Source: Union budget documents
There is another way of looking at the cess on petrol and diesel. Table 1 below gives a breakdown of the union taxes on petrol and diesel for 2020-21 and 2021-22. Note that the table below only analyses central excise tax and excludes customs duty. There are technical complications in figuring out the per litre customs duty.
Table 1: Central government tax breakdown on petrol and diesel.
The total union excise duty on petrol and diesel, in 2021-22 are Rs 32.90 per litre and Rs 31.80 per litre, respectively, which are marginally lower than the previous year. All taxes other than basic excise duty, including special additional excise duty, which is a surcharge, are exempt from the divisible pool.
1)For 2021-22, only ~5% of the excise taxes on petrol and diesel will go to the divisible pool. The rest (~95%) will be kept by the central government. In 2020-21, this portion was at around 91% for petrol and 85% for diesel. Clearly, the government is keeping a greater share of petrol and diesel taxes for itself.
2)The above point does not clearly bring out the gravity of the situation. Let’s do a simple calculation to show that. In 2021-22, the total excise duty on petrol stands at Rs 32.90 per litre. Of this, the basic excise duty of Rs 1.4 per litre is the only part which is a part of the divisible pool and hence, will be shared with the states. It is worth remembering only 41% of this or around 57 paisa per litre needs to be shared with the state governments.
What this means is that just 1.7% of the total excise duty earned by the central government per litre of petrol will be shared with the state governments. It was at 3.8% in 2020-21.
3)Now let’s carry out the same exercise for diesel. The total excise duty earned by the central government on the sale of one litre of diesel will be Rs 31.80 during 2021-22. Of this only Rs 1.8 per litre will be shareable with state governments. 41% of this amounts to around 74 paisa per litre.
This amounts to around 2.3% of the total excise duty of Rs 31.8 per litre earned by the central government per litre of diesel. It was at 6.4% in 2020-21.
4)In 2021-22, a new agriculture infra cess has been introduced. It amounts to Rs 2.5 per litre on petrol and Rs 4 per litre on diesel. This has led to the reduction of basic excise duty on petrol from Rs 2.98 per litre to Rs 1.4 per litre and that on diesel from Rs 4.83 per litre to Rs 1.8 litre. As mentioned earlier, only the basic excise duty needs to be shared with the state governments.
Hence, by introducing a new agriculture infra cess, the central government has ensured that state governments get an even lower share of taxes from petrol and diesel in 2021-22.
The general public is quite sensitive to price rise at the petrol pump since it is a highly visible and recurrent cost. That the government has still resorted to this strategy for increasing revenue, speaks to the lack of better options – a fact that is a direct consequence of the tepid economic scenario even before the pandemic began. Of course, the covid pandemic has only made things more difficult for the government on tax front.
Nonetheless, things are even more difficult for state governments, which don’t have many avenues to raise tax. Clearly, this amounts to the centre shortchanging the state governments during difficult economic times.
Oh wait, there is more – Total intergovernmental transfers
Other than the divisible pool of taxes, there are other channels of intergovernmental transfers between the central government and the state governments. So, to get the complete picture on the flow of money from the central government to the state governments, it is instructive to examine the total intergovernmental funds transferred in more detail.
Before diving into those details, a brief overview of intergovernmental transfers would be useful. Figure 7 below is a good graphical representation of all the ways in which the central government can transfer funds to the state governments.
Broadly speaking there are two instruments of fund transfers.
1)Finance Commission funds: As discussed earlier, this includes the 41% of the divisible pool revenue, general-purpose grants for states with weak revenue raising capacity and specific purpose grants for funding local governments (panchayats and municipalities) and funding certain specific initiatives (eg. health-sector grants by the 15th FC). Most of the funds provided via the FC channel are not conditional and don’t require state government contributions.
2)Funds from central ministries: In addition to the FC funds, the central government also gives specific purpose grants through the respective ministries. These funds are transferred either through centrally sponsored schemes or central sector schemes. Central sector schemes are entirely funded by the central government. Some examples include the free LPG connections provided to poor households, crop insurance scheme etc.
The centrally sponsored schemes require a matching component from the state governments i.e. they have to fund a portion of the scheme. Examples of this include the Pradhan Mantri Gram Sadak Yojana, the Swachh Bharat Mission etc.
As Figure 7 shows, the mechanism of intergovernmental transfer underwent a major transformation in 2015. Two things led to this. Firstly, the 14th FC gave its recommendations for increasing the devolution share of state governments from 32% to 42% and eliminating a host of specific purpose grants. The underlying rationale was to change the composition of state transfers to increase the “no-strings-attached” outlays and reduce conditional grants to give state governments more financial headroom.
Secondly, the newly elected NDA government disbanded the Planning Commission and replaced it with the NITI Aayog. While the NITI Aayog has some shades of resemblance with the Planning Commission, the five-year plans, which was the responsibility of the Planning Commission, were scrapped.
The five-year plans would have their own grants for states in the annual budget of the central government. The establishment of the NITI Aayog and the approval of the 14th FC recommendations were two initiatives that formed the basis the oft-cited “cooperative federalism” mantra of the NDA government, especially in the early years.
The argument put forth to claim this catchphrase was that the Modi-led administration was reversing the centralising tendencies of earlier governments and ushering in an environment where states had greater fiscal autonomy.
Does the data corroborate these claims? Let us examine. Figure 8 below charts the tax devolution to states as a portion of the gross tax revenue.
Figure 8: Tax Devolution vs Gross Tax Revenue (in %).
Source: Union budget documents
Some interesting observations can be made from Figure 8.
1)The first few years after the 14th FC came to effect (April 2015) saw a significant increase in the portion of taxes devolved to the states.
2) This increasing trend of devolution peaked in 2018-19 when the devolution was 36.6%. The last three years have seen this number come down, with the 2020-21 figure (~29%) close to the pre-2015 levels. So, all the talk about cooperative federalism has gone for a toss, in the last few years.
3) Note that these numbers don’t reflect the 32% (pre-2015) or 42% (post-2015) devolution share prescribed by the FC since cess and surcharge revenue is not devolved. This also explains why the devolution percentage has dipped sharply in the last two years, a period when cess revenue has had a corresponding increase (as shown earlier in Figure 5).
While the 14th FC may have been the catalyst, the Modi government can rightfully claim credit for strengthening fiscal federalism, at least in its first term. However, most of these gains have been reversed in their second term. This justifies N.K Singh’s lament:
“ It should not be a cat and mouse game that every finance commission raises the devolution number and it then neutralised simultaneously by an increase in cess and surcharge leaving the states where they were, nor the opposite way.”
Next, in Figure 9, let us look at the total transfers made to state governments in recent years, not just tax devolution. The total transfers to states includes tax devolution, finance commission grants, centrally sponsored schemes, central sector schemes and other miscellaneous items listed as state transfers in the union budget.
The figure below charts the total transfers made to states as a percent of the total expenditure of the Union government.
Figure 9: Portion of total expenditure of central government transferred to state governments (in %).
Source: Union budget documents
There are two caveats on the chart above.
1)Starting 2014-15 there was a change in how expenditure for central schemes was routed to the states. The figures for 2013-14 have been adjusted to make the comparisons with the subsequent years correctly.
2) We have excluded loans made to states from the total transfer amounts and only included grants and devolution, since loans do need to be repaid.
That said, these figures also lead to similar observations made from Figure 8. The period from 2015-16 to 2018-19 (roughly co-incident with NDA’s first term) had a significant increase in funding to the state governments.
While the increased devolution of taxes could be attributed to the recommendations of the 14th FC, the increase in total transfer of funds was certainly government policy. The last two years (and the projections for the next year) show a steep decline in the intergovernmental transfers. The huge spike in cess and surcharge collections which are not shared with states and declining tax revenues during this period contributed to this effect.
There are two other conjectures one can make based on the trends seen above. First, when Narendra Modi won in May 2014, he was a sitting chief minister and his perspective on governance was heavily biased towards the challenges of governing a state.
Hence, financial outlays were perhaps favourable to the states. In the second term, he was well-entrenched as a national leader and the instincts were now honed favouring centralisation.
Second, the Bhartiya Janata Party has adopted an increasingly overt approach favouring homogenisation of the country. Whether it is the abrogation of Article 370, the passage of national farm laws, or flirtations with one-nation-one-language, it is evident that impulse is towards uniformity and centralisation. In this context, the trend of holding back funds from states, seems a natural accompaniment.
Late last week the central government announced the vehicle scrapping policy (VSP). As the Minister for Road Transport and Highways, Nitin Gadkari, put it in the Parliament, the aim of the VSP is to create “an eco-system for phasing out of unfit and polluting vehicles”.
So how will this be put into action? Using the public private partnership (PPP) model involving the state governments, private sector and the automobile companies, the central government plans to promote the setting up of automated fitness centres (AFCs).
These AFCs will issue vehicle fitness certificates to private vehicles and commercial vehicles based on “emission tests, braking, safety equipment among many other tests which are as per the Central Motor Vehicle Rules, 1989.”
A commercial vehicle which is 15 years old and fails the vehicle fitness test will be declared an end of life vehicle and scrapped. Similarly, a private vehicle which is 20 years old and fails the vehicle fitness test will be declared to be an end of life vehicle and scrapped. Further, if owners don’t renew the registration certificate, their vehicle may be declared as an end of life vehicle and scrapped.
In order to disincentivise commercial vehicle owners who own vehicles which are 15 years old, from continuing to use them, even if they clear the vehicle fitness test, the fee for the fitness certificate and the fitness test will be set on the higher side. For private vehicle owners with vehicles which are 15 years old, the re-registration fee will be set on the higher side.
The point being that if you have a private vehicle which is 20 years old or perhaps even older, the government wants you to stop using the vehicle and buy a new one, irrespective of what state it is in. For commercial vehicles, the same logic applies for vehicles which are at least 15 years old.
And the expectation is this will lead to lower pollution, newer cars, safer pedestrians, more spending, more investment and more jobs. QED.
The minister expects additional investments of Rs 10,000 crore and 35,000 job opportunities to be created because of this.
It will also lead to banks and non-banking finance companies (NBFCs) giving out more loans. Of course, given that the auto industry and the auto-ancillary industry use a lot of contract workers, one could possibly argue that this could lead to more work opportunities for them as well.
The question is how will things really play out? Let’s try and understand that in some detail.
Economics is basically the study of incentives and second order effects. The trouble is that politicians and policy makers don’t keep this in mind while designing policy, particularly the second order effects of what they are proposing.
Let’s try and understand this pointwise.
1) There are a total of 1.02 crore vehicles, both commercial and private, which fall under the defined category of older vehicles. Even if a small proportion of these vehicles are scrapped they will generate a huge amount of non-biodegradable waste.
What plans do we have to handle all this waste coming our way? As the press release announcing the policy pointed out: “Efforts are also being made to set up Integrated Scrapping Facilities across India.” Even while taking into account that this policy will be implemented over the next few years, this sounds too much like work in progress than definitive economic policy. One needs a lot more clarity on this front.
2) As a way to get the scheme going, the government first plans to scrap its older vehicles. As the press release announcing the plan puts it: “It is being proposed that all vehicles of the Central Government, State Government, Municipal Corporation, Panchayats, State Transport Undertakings, Public Sector Undertakings and autonomous bodies with the Union and State Governments may be de-registered and scrapped after 15 years from the date of registration.” This is supposed to be implemented from April 1, 2022 onwards, or little over a year from now.
Why have this blanket policy at a time when governments, in particular state governments, are already short of money? Why not look at the fitness of vehicles and then decide? If at all, vehicles of the central government and the public sector enterprises tend to be decently maintained.
3) Also, the assumption here is that only older vehicles cause pollution. The manufacturing of newer vehicles needs electricity. Most electricity in India is generated by burning coal, which causes pollution. Steel goes into the making of vehicles. The process of making of steel, releases carbon dioxide into the atmosphere. That causes pollution as well. The same is true of plastic and pretty much everything else which goes into the making of vehicles. Hence, every new vehicle that is produced has a carbon footprint.
Of course, all this pollution doesn’t show up in cities where most private vehicles are driven and tends to be well distributed across the country. But shouldn’t a policy that has lower pollution as one of its key points, take this basic factor into account as well? Further, we need to consider the fact that many older private vehicles are not constantly in use.
4)As I have explained earlier, the government wants private and commercial vehicle owners to buy new cars. Of course, as and when this happens, the automobile companies are supposed to benefit. This explains why companies have come out in favour of this policy (or even otherwise, when do Indian businessmen ever disagree with the government). But this doesn’t take a very basic factor into account.
Whatever we might like to say about the new India and such things, we are a poor country at the end of the day. And covid has only made things even more difficult by pushing many more people into poverty, as health bills have mounted, incomes have crashed and small businesses have gone bust.
Hence, assuming that people will go out and buy new vehicles if the older vehicles are scrapped or because re-registration is made more expensive, is just looking at first order effects of policy, in the same way that economists tend to believe that lower interest rates always push up consumption.
Private vehicle owners who are not heavy users of their vehicles, might just prefer to use Uber or Ola or even the metro infrastructure coming up across India’s major cities. (This reminds me of a time when the government kept telling us that slower automobile sales were primarily because of Uber and Ola).
Further, owners might financially not be in a position to buy a new vehicle. Already, the trucking industry has spoken up against the idea.
Also, even if owners buy a new vehicle, they might cut consumption on something else given that there is only so much money going around. Hence, net-net, the impact on the overall economy may not be much.
The trouble is that the costs of second order effects are not so obvious and straightforward, whereas the supposed benefits are easy to convey in a simplistic way. And politicians love stuff which they can convey in a simplistic way.
5)Kitna deti hai (how much does it give?), goes a Maruti advertisement, telling us that Indians are price conscious value for money consumers. And there is nothing wrong with this, given that an automobile is probably the second most expensive thing we buy during our lifetime. So, while the idea that old polluting vehicles need to be discarded is a noble one, what is in it for the consumer?
This is what the government is planning. a) The owner will be paid 4-6% of the showroom price of a new vehicle, when his old vehicle is scrapped. b) The state governments may be advised to offer a road- tax rebate of up to 25% for personal vehicles and up to 15% for commercial vehicles. c) The vehicle manufacturers are also advised to provide a discount of 5% on purchase of new vehicle against the scrapping certificate. d) The road transport minister has requested the finance minister and states to give a concession in goods and services tax (GST) on purchase of new vehicles.
There are too many ifs and buts in the above paragraph. As usual, the government seems to be in a hurry to announce and implement a policy. As I have said in the past a massive cut in GST on automobiles will encourage buying. What the government will lose out on per unit of sales, it is more than likely to make up for through volumes.
One understands that the road transport minister cannot ensure all of this on his own, which is why it is important that the government spends some time in discussing and figuring out how to design and implement policy. Also, it is important to carry out small experiments in union territories, before announcing policies which need to be implemented across the length and the breadth of the country.
As Vijay Kelkar and Ajay Shah write In Service of the Republic:
“The safe strategy in public policy is to incrementally evolve—making small moves, obtaining feedback from the empirical evidence, and refining policy work in response to evidence.”
But the trouble is that small moves involve a lot of time, effort and thinking, which is very difficult for a government which believes in constant action and constantly creating new narratives to keep people busy and happy. The narrative also feeds into the idea that the government is trying to do new things.
6)Take a look at what happened to two-wheeler sales in 2019-20 (This is before covid struck). Sales fell by nearly 18% year on year to 17.42 million units, as the price went up due to various reasons. Hence, India is a very price sensitive market and the point is that there has to be a huge benefit involved in buying a new vehicle in a tough economic environment.
While the notion of pollution control is a noble one, it is not something which is going to get people to go out and buy new vehicles, unless it is very clear what is in it for them. Ultimately, if you want people at large to behave in a certain way, the right incentive should be on offer, something this half-baked policy, like the policy to encourage electric vehicles before it, lacks.
To conclude, one does wonder, what were they doing all these years, given that the policy has been on the anvil for a while now.