India might grow by 30% early next year, but that won’t mean much.

छोड़ो कल की बातें, कल की बात पुरानी
नए दौर में लिखेंगे, मिल कर नई कहानी
हम हिंदुस्तानी, हम हिंदुस्तानी
— Prem Dhawan, Usha Khanna, Mukesh and Ram Mukherjee in Hum Hindustani. 

The Indian economy contracted by 7.5% during July to September 2020, in comparison with the same period in 2019.  When compared with a contraction of 23.9% during April to June 2020, a contraction of 7.5% looks significantly better.

Hence, there has been a lot of song and dance from the establishment and its supporters, on how quickly the Indian economy is recovering, especially when most economists expected the economy to contract by 10% during July to September and it contracted by only 7.5%. Terms like a V-shaped recovery have been bandied around a lot, over the last few weeks.

Nonetheless, India continues to remain in the bottom quartile, when it comes to economic growth/contraction of countries between July to September this year. Greece with an economic contraction of 11.7% is right at the bottom.

In fact, the song and dance of the establishment is likely to continue in the months to come and will reach its peak sometime in the second half of the next year, after the gross domestic product (GDP) figure for the period April to June 2021, is published. GDP is a measure of the economic size of a country.

It is worth remembering here that the GDP during the period April to June 2020 contracted by nearly a fourth. The GDP during the period was Rs 26.90 lakh crore. In comparison, the GDP during April to June 2019 was at Rs 35.35 lakh crore.

So, the GDP during April to June 2021, will grow at a pace which has never been seen before. If it comes in at Rs 30 lakh crore, the growth will be around 11.5%. Given that, the GDP during the period July to September 2020 was already at Rs 33.14 lakh crore, the GDP during April to June 2021, is likely to be higher than that.

At a GDP of Rs 35 lakh crore, the economic growth during April to June 2021 will come in at a whopping 30.1%. Nevertheless, this is just an impact of what economists like to call the low-base effect.

A central government which can use a contraction of 7.5% to market itself, imagine the possibilities of what it can do if the economic growth rate crosses 30% in the first quarter of the next financial year.

While, some song and dance can do no harm to the economy, the real story needs to be understood and told as well. The real GDP in April to June 2021 will be more or less where it was during April to June 2019. In that sense, we will be where we were two years back.

Hence, the economic slowdown which started in mid 2018, along with the contraction that has happened post the spread of the corona epidemic, has pushed the Indian economy back by at least two years. Obviously, this can’t be good news.

Other than talking, the central government hasn’t done much to get the Indian economy going. Between April and October 2020, the government spent a total of Rs 16.61 lakh crore. In comparison, it had spent Rs 16.55 lakh crore during the same period in 2019. The difference being, this year we are in the midst of an economic contraction.

In a scenario where the corporates as well as individuals are going slow on spending money, government spending becomes of utmost importance. Between March 27 and November 20, the non-food credit of banks has gone up just Rs 26,496 crore.

Banks give loans to the Food Corporation of India and other state procurement agencies to buy rice and wheat, directly from the farmers. Once these loans are subtracted from the overall lending of banks what remains is non-food credit.

In comparison, the deposits of banks have gone up by Rs 8.03 lakh crore during the same period. This means just 3.3% of the fresh deposits that banks have got post March have been lent out.

What does this tell us? It tells us that both corporates and individuals are largely sitting tight and saving money. This is an indication of the lack of confidence in the near economic future. While the corporate executives might keep going gaga in the media about an economic revival, these numbers tell us a different story.

What hasn’t helped is the fact corporates have reported bumper profits by driving down their raw material costs, input costs and employee costs. This basically means that along with employees, the suppliers of corporates have also seen an income contraction. This can’t be good news for the overall economy.

The government’s inability to spend, comes from the lack of tax revenues, something that is bound to improve in 2021-22. Other than that, the government hasn’t gotten around to selling its stakes in public sector enterprises. Of the targeted Rs 2.1 lakh crore just 3% has been achieved. This is bizarre given that the stock market is at an all-time high-level.

Hopefully, the government will make up on this in the next financial year. Also, it can look at selling some of the land that it owns in prime localities in Indian cities.

All this can be used to put more money in the hands of consumers through an income tax cut and a goods and services tax cut, encouraging them to spend.

People who pay income tax may form a small part of the population but they are the ones who actually have some purchasing power. And once they start spending more, the chances of it boiling down the hierarchy are higher. Do remember, at the end of the day, one man’s spending is another man’s income.

A slightly different version of this piece appeared in the Deccan Herald on December 20, 2020.

Why 2.8 Crore Indians Applied for 90,000 Jobs in Indian Railways

indian flag
The Indian Railways recently got 2.8 crore applications for around 90,000 jobs it had advertised for.

This basically means that the ratio of number of applicants to the number of jobs stands at 311:1. Further, it means that 18.7% of India’s youth workforce (people in the age group 18-29) applied for it. Or to put it a little more simplistically, every one in five individuals who are a part of India’s youth workforce, applied for these jobs.

This is even without taking any education qualifications into account. If we do that (i.e. people who have at least passed the tenth standard or some such parameter), the proportion of India’s youth workforce which applied for these jobs in the Indian Railways would go up even further.

If this is not an indication of India’s massive jobs crisis, we don’t know what is.

The argument being offered against this is that just because someone has applied for a government job, does not mean he or she is unemployed. Of course, this is a fair argument, but an incomplete one. Allow me to explain.

Let’s us look at Table 1, a table we have used multiple times before.

Table 1: 

Table 1 clearly tells us that only 60.6% of India’s workforce which is looking for a job all through the year, is able to find one. So, yes Indians may not be unemployed, but they are terribly underemployed. Hence, nearly 40% of Indians looking for a job all through the year are unable to find one. Or two in five Indians who are looking for a job all through the year are unable to find one.

Further, this underemployment translates into low levels of income, as can be seen from Table 2.

Table 2: Self-employed/Regular wage salaried/Contract/Casual Workers
according to Average Monthly Earnings (in %) 

Table 2 shows us the income levels of India’s workforce. As far as the self-employed and the contract workers are concerned, nearly two-thirds of them make up to Rs 7,500 per month or Rs 90,000 per year. In case of contract workers, more than 84% of contract workers earn up to Rs 7,500 per month or Rs 90,000 per year.

The per capita income in 2015-2016 was at Rs 1.07 lakh. This basically means that a bulk of India’s non-salaried workforce, earns a significantly lower income than the per capita income.

The non-salaried workforce works largely in the informal sector, which forms a bulk of India’s economy (as high as 92% as per one estimate). As the Economic Survey of 2015-2016, points out: “By most measures, informal sector jobs are much worse than formal sector ones-wages are, on average, more than 20 times higher in the formal sector.”

Given these low levels of income primarily because of huge underemployment, so many people tend to apply for government jobs in general, and the recent vacancies in Indian Railways are no exception to this. People are looking for a regular and stable source of monthly income. They want to get rid of the irregularity of payment that they have to regularly deal with in the informal sector.

The Indian government is a good paymaster, especially at lower levels. As the Report of the Seventh Pay Commission points out: “To obtain a comparative picture of the salaries paid in the government with that in the private sector enterprises the Commission engaged the Indian Institute of Management, Ahmedabad to conduct a study. According to the study the total emoluments of a General Helper, who is the lowest ranked employee in the government is Rs 22,579, more than two times the emoluments of a General Helper in the private sector organizations surveyed at Rs 8,000-9,500.”

Hence, the IIM Ahmedabad study “on comparing job families between the government and private/public sector has brought out the fact that…at lower levels salaries are much lower in the private sector as compared to government jobs.”

In this scenario, it isn’t surprising that so many people apply for government jobs in India. The employment opportunities in the informal sector are irregular and simply don’t pay enough. India’s huge underemployment gets reflected in the number of people applying for government jobs.

And at the end of the day, underemployment is also a representation of unemployment and the huge jobs crisis that India is facing. There simply aren’t enough jobs/employment opportunities which will keep individuals occupied for the full year, going around, for everyone who is a part of India’s burgeoning workforce.

Indeed, that is something to worry about. And what is even worrying is that the Modi government is not worrying about this huge issue.

Postscript: Dear Reader, you must be wondering why are we still using 2015-2016 data even in 2018-2019. The Labour Bureau carried out six household-based Annual Employment-Unemployment Surveys (EUS) between 2010 and 2016. Of these, reports of five rounds have been released till date. The last report was released in September 2016. The question is, why has the report for the sixth round of the Survey not been released till date.

Recently, in an answer to a question raised in Parliament, the government said, “On the recommendations of the Task Force on Employment, however, this survey has been discontinued.” Basically, a survey that brought bad news in the form of huge underemployment that India has been facing, has been discontinued, and then the government goes around talking about lack of data.

The column was originally published on Equitymaster on April 16, 2018.

How Modi Cherry-Picked Data To Build A Positive Narrative On The Economy


The prime minister Narendra Modi in a speech yesterday assured the nation that All is Well with the Indian economy, and that there was no reason to worry.

He offered data to sell his argument. Let’s go through some of the data that he offered and see what he told us and more importantly what he did not.

1) The fiscal deficit of the government has fallen from 4.5 per cent of the gross domestic product (GDP) in 2013-2014, when Manmohan Singh was prime minister, to 3.5 per cent in 2016-2017. Fiscal deficit is the difference between what a government earns and what it spends.

Yes, the fiscal deficit has come down. A major reason for this is the fall in oil prices, since Modi took over as prime minister. On May 26, 2014, the day Modi was sworn in as prime minister, the price of Indian basket of crude had stood at $108.1 per barrel. As of October 4, 2017, the price was at $55 per barrel, having fallen to even lower levels during the period.

Oil prices go up and down due to a whole host of reasons and Modi’s government has almost no role to play in it.

The central government has captured much of this fall in price of oil, by increasing the excise duties on petrol and diesel, thereby increasing its earnings, and thereby bringing down the fiscal deficit. As they say, there is a difference between making things simple and making them simplistic.

2) Prime Minister Modi also claimed in his speech that the current account deficit has improved from -1.7 per cent of the GDP in 2013-2014 to -0.7 per cent of the GDP in 2016-2017. The current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances. Or to put it in simpler terms, it is the difference between outflow (through imports) and inflow (through exports and foreign remittances) of foreign exchange.

Again, this has primarily been account of fall in the price of oil and thus a fall in the total amount of dollars that India pays for importing oil. India imports around 80 per cent of the oil that it consumes. Hence, Modi’s government has had very little role to play in the fall of the current account deficit.

It further needs to be pointed out that imports are a negative entry in the GDP calculation. So, if imports fall, the GDP rises automatically, assuming everything else stays the same. Falling oil imports are a big reason for the pick-up in the GDP growth, during Modi’s tenure as prime minister.

3) Take a look at the following chart, which was a part of the prime minister’s presentation yesterday.


As per this chart, the total foreign exchange reserves have risen by close to $ 60 billion during the period that Modi has been prime minister. In contrast, they were more or less flat when Manmohan Singh was the prime minister. At least that is what the above chart suggests.

This is primarily because of data has been taken from the end of 2011-2012 onwards. What happens if the data would have been taken from the end of 2003-2004 onwards. Manmohan Singh first became prime minister in May 2004.

As of March 31, 2004, the total foreign exchange reserves were at around $113 billion. By March 2014, they had jumped to around $304 billion. This meant an increase of 10.4 per cent per ear on an average. Between April 2014 and September 2017, the growth rate in foreign exchange reserves has been at 8.3 per cent per year on an average.

Hence, foreign exchange reserves accumulated at a much faster rate during Manmohan Singh’s tenure as prime minister. Of course, a bulk of these gains came during the first five years of the tenure, when the forex reserves increased at the rate of 17.4 per cent per year. Between 2009 and 2014, when the Congress led UPA made a mess of the economy, the increase in foreign exchange slowed down dramatically to 3.8 per cent per year on an average.

Basically, who did well, Singh or Modi, on the foreign exchange front, depends on where we start measuring from.

4) Prime Minister Modi further said that the interest rate that the government pays on the money that it borrows has fallen from 8.45 per cent in 2013-2014 to 7.16 per cent in 2016-2017. This has happened primarily due to two reasons. The falling fiscal deficit has led to the government having to borrow lesser in proportion to the size of the economy. With the government borrowing lesser, interest rates have come down.

It is important to remember here that the government has had to borrow lesser because it has increased excise duty on petrol and diesel and captured the bulk of the gain of falling oil prices.

Also, after demonetisation, a huge amount of deposits ended up with banks. These deposits were reinvested into government securities and in the process interest rates on government securities came down.

5) Prime Minister Modi pointed out that food inflation is in negative territory. The question is, is that a good thing? Why is food inflation in negative territory? It is in negative territory because farmers haven’t got the right prices for their produce. This is primarily on account of the fact that agri-supply chains have collapsed in the aftermath of demonetisation, forcing farmers to sell their produce at rock bottom prices.

The thing is there is no free lunch in economics. The collapse in food prices led to farmers demanding a waiving off agriculture loans and that has happened in state after state. It is ultimately expected to cost the nation, in the form of state governments compensating banks, more than Rs 2 lakh crore.

6) Over and above this, the prime minister shared data on a few consumption data points. Car sales, two-wheeler sales and tractor sales have improved, since June, hence, all is well.

What the prime minister did not tell us is the rapid rise in non-oil non-gold non-silver imports, post demonetisation. Take a look at the following chart.


Source: Ministry of Commerce and Industry.

Imports also represent consumer demand at the end of the day, even though that demand does not add to the country’s GDP. For example, every time an Indian buys an electronic good manufactured in China, he is adding to the consumer demand but not to the GDP. Of course, he is adding to the Chinese GDP because exports are a positive entry into the GDP formula.

Hence, if we remove the imports of oil, gold and silver, from the total imports number (in dollars), what remains (i.e. non-oil non-gold non-silver imports) is a good indicator of consumer demand.

The above chart tells us that non-oil non-gold non-silver imports have grown at an extremely fast rate after October 2016. They are growing at rates at which they haven’t grown for a couple of years. What is happening here?

Demonetisation destroyed domestic supply chains. Without supply chains products can’t move. This has resulted in consumer demand being fulfilled through imports.

This is clearly visible in the huge growth of non-oil non-gold non-silver imports. What this also means is that as demonetisation destroyed supply chains in India, it also led to a huge job destruction. If goods weren’t moving, there was no point in producing them either. This meant shutdown of firms and massive job losses.

Further, by importing stuff that we used to produce in India earlier, we have helped the manufacturing business in foreign countries and in the process “possibly” helped create jobs there.

Of course, this is something that the prime minister did not tell us in his speech. What he further did not tell us is that:

a) During the course of this financial year between April and August 2017, the total outstanding loans of banks (non-food credit) have shrunk. Only retail loans are growing, loans to industry, agriculture and services have shrunk. This, even though interest rates have fallen. What this clearly tells us is that a large section of the economy is not in a good shape and in no mood to borrow money and that is not a good thing.

b) As on March 31, 2017, 22 out of 27 public sector banks had a bad loans ratio of 10 per cent or more. This basically means that out of every Rs 100 of loans given by these banks, Rs 10 or more of loans had gone bad and weren’t being repaid.
In fact, five banks had a bad loans rate more than 20 per cent, which basically means that more than one-fifth of the loans given by these banks had gone bad and were not being repaid.
This is a problem that has only grown during Modi’s tenure. He and his government have sat on it, and only blamed the previous government for the mess.

c) All the so-called attack on black money has had a very limited impact on the price of real estate. While prices haven’t risen, they haven’t fallen either. This essentially means that homes continue to remain unaffordable for most people.

d) There has been almost no talk on how demonetisation and now the badly implemented GST have played havoc with the functioning and the existence of small and medium enterprises. If small and medium enterprises keep getting destroyed how is the country ever going to create jobs. It is worth remembering here that one million Indians are entering the workforce every year. Where are the jobs for these people?

e) Our primary education system continues to remain in a mess, with most children finding it difficult to read, write and do basic maths. It has been more than 40 months since Modi was elected prime minister, and nothing serious has been done on this front.

f) The non-government GDP has collapsed to 4.3 per cent. The non-government part of the GDP amounts to close to 90 per cent of the economy.

g) The growth rate of industry in general and manufacturing and construction in particular is at a five-year low. The manufacturing part of industry grew at 1.17 per cent during April to June 2017, whereas construction grew by 2 per cent during the same period. Also, it is worth pointing out here that manufacturing and construction together form 82-85 per cent of industry. If these sectors are barely growing, how will any jobs be created?

I can go and on the bad state of the Indian economy, but there is only so much time and only so much space. The trouble with trying to be clever all the time is that ultimately you get found out and more importantly, the nation doesn’t go anywhere.

The first step towards solving a problem is recognising that it exists. The economy has a problem, it is time that the government acknowledged that and worked towards it.

The column originally appeared on Huffington Post on October 5, 2017.

All is well with the economy? Surely you must be joking, PM Modi


Prime Minister Narendra Modi briefly turned economist, in a speech, a couple of days ago, and in his charismatic and characteristic style told the country that there is no reason to worry, all is well.

He further said that people who were critical of the current economic scenario were spreading pessimism because only after spreading pessimism could they sleep well at night.

Modi offered us a whole host of economic data to show that India continues to do well. On economic growth slowing down to 5.7 per cent during April to June 2017, the Prime Minister had this to say: “Is it the first time that economic growth during a quarter has reached 5.7 per cent?

He then went on to point out: “In six years of the previous government, eight times the economic growth rate had fallen to 5.7 per cent or lower.”

By this logic, nothing that is happening now is a reason to worry because it has, more or less, already happened before. This seems like pretty convoluted logic. Also, it goes back to what the Bharatiya Janata Party (BJP) does every time it is in some sort of a soup: blame the Congress.

In this piece, I will stick to the economic growth point, having made a point-to-point rebuttal of Modi’s cherry-picking of data to build a positive economic narrative, elsewhere.

Let’s look at Figure 1, which basically plots the quarterly (three-month period) gross domestic product (GDP) growth from June 2012 onwards.

Figure 1

Source: Ministry of Statistics and Programme Implementation

What is plotted as June 2012 in Figure 1 is basically the economic growth (GDP growth) during April to June 2012 in comparison to April to June 2011. This is true for all other data points.

The question is why have I taken economic growth from the period of three months ending June 2012 onwards? The answer lies in the fact that the new GDP series that the government started using from January 2015, has data starting from April to June 2011 onwards.

Given this, economic growth can be calculated only from April to June 2012 onwards. It will become clear later in this piece as to why am I making this point.

As is clear from Figure 1, economic growth has been falling from March 2016 onwards. The economic growth has fallen for the last six quarters. This is a real reason for worry. This is something that PM Modi forgot to mention in his big speech. This has never happened before if we were to just look at the new GDP series.

As mentioned earlier, Modi pointed out in his speech: “In the six years of the previous government, eight times the economic growth rate had fallen to 5.7 per cent or lower.”

As can be seen from Figure 1, economic growth has fallen below 5.7 per cent five times. Of this, economic growth fell below 5.7 per cent four times when Manmohan Singh was PM. It needs to be mentioned here that Manmohan Singh was the PM for 10 years, whereas Modi has been for three-and-a-half.

So, how Prime Minister Modi ended up saying that during the previous government “eight times the economic growth rate had fallen to 5.7 per cent or lower”, is a question well worth asking.

Did he use the old GDP series along with the new GDP series? Let’s merge the data from the two series (which is not the right way of going about things, but nonetheless) and see what we get.

Basically, we use GDP growth from the old series between the period of three months ending June 2005 and the period of three months ending March 2012, and after that we use the new GDP series. Take a look at Figure 2.

Figure 2

Source: Ministry of Statistics and Programme Implementation

Even after merging the two series, we get only five instances of growth falling below 5.7 per cent during the previous regime. This makes me wonder, where did Prime Minister Modi’s speech writer get the data from?

Modi had also said in his speech: “The country’s economy has seen quarters when the economic growth rate has fallen to levels of 0.2 per cent, 1.5 per cent.”

This hasn’t happened any time since June 2005 (again, we come to this conclusion only by wrongly merging the two GDP series, but Prime Minister Modi’s speech doesn’t leave us with any other option).

While the new GDP series has been in use from January 2015 onwards, the government hasn’t come up with GDP data based on the series for the period before April to June 2011, up until now.

The reason perhaps lies in the fact that the old GDP series under-declared growth to the extent of 2 per cent. Hence, any economic growth data from before April to June 2011 will basically end up showing the current slow rate of economic growth, in further bad light.

Now let’s take a look at Figure 3.

Figure 3

Source: Author calculations on data from the Ministry of Statistics and Programme Implementation

Figure 3 basically plots the growth of the non-government part of the economy, which typically constitutes 87 to 92 per cent of the economy. The growth of the non-government part of the economy has fallen to around a little over 4 per cent. This extremely important detail did not find a place anywhere in Prime Minister Modi’s speech.

If the non-government part of the economy is growing at such a slow rate, how will jobs for the one million youth entering the workforce every month, ever be created. The situation becomes even more worrisome if we look at Figure 4.

Figure 4

Source: Ministry of Statistics and Programme Implementation

As is clear from Figure 4, the growth rate of industry in general and manufacturing and construction in particular is at a five-year low. The manufacturing part of industry grew at 1.17 per cent during April to June 2017, whereas construction grew by 2 per cent during the same period.

This is a big reason to worry simply because manufacturing and construction have the potential to create new jobs. An estimate made by Crisil Research suggests that in construction, 12 workers are typically required to create Rs 10 lakh worth of output. In case of manufacturing, it is seven workers.

India’s economy has a problem. The sooner the government acknowledges and works towards it, the better it is going to be for all of us. But in this era of post-truth, it is more important for the government to keep spinning things than acknowledge the truth.

The column originally appeared on Newslaundry on October 6, 2017.

What You Pay For When You Pay for Fuel

narendra modi
The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.

Narendra Modi, took over as the prime minister of the country on May 26, 2014. On that day, the global price of the Indian basket of crude oil was $108.05 per barrel. Back then, one litre of petrol cost Rs 80 in Mumbai. Diesel in the city was being sold at Rs 65.21 per litre.

Three years have gone by since then and meanwhile, the global oil scenario has changed completely. On September 14, 2017, the price of Indian basket of crude oil was at $54.56 per barrel, around half of what it was when Modi took over as prime minister.

At Rs 79.5 per litre, the price of petrol in Mumbai as on September 14, 2017, in Mumbai, was more or less same as it was when Modi took over as prime minister. Diesel at Rs 62.46 per litre was slightly lower.

What is happening here? While, the price of crude oil has halved, the price of petrol and diesel, which are by-products of crude oil, continues to remain more or less the same (This argument may not hold all across the country, given that different states levy different taxes and different rates of taxes on petrol and diesel).

The gain because of fall in price of oil, has been captured majorly by the central government and the state governments, by increasing the different taxes that are levied on petrol and diesel. Lately, the commission given to pumps which sell petrol and diesel, has also gone up.

A small-scale industry has emerged lately, trying to defend the high taxes that consumers pay on petrol and diesel. Here are the arguments on offer:

a) India imports 80 per cent of the oil that it consumes. Given this, prices of petrol and diesel need to be high, in order to discourage people from consuming more and more of it. The assumption is that at lower price levels, people will consume more petrol and diesel.

b) We need to respect the environment. Petrol and diesel pollute the environment, and hence, taxes on petrol and diesel need to be high.

c) The high taxes on petrol and diesel have helped the government bring down its fiscal deficit without having to cut on its expenditure. This is something that is required in an economic environment where growth is slowing down and hence, government spending needs to be strong. Fiscal deficit is the difference between what a government earns and what it spends.

d) High taxes on petrol and diesel help the government earn enough money in order to fund the physical infrastructure that the country badly needs.

e) High petrol and diesel prices push demand towards more fuel-efficient cars. Also, by taxing petrol more than diesel, the government is ensuring that the private modes of transport (which largely use petrol) are taxed more than the public modes of transport (which use diesel).

f) The oil marketing companies need the flexibility to price their products on a day to day basis. It is this flexibility that reflects in the healthy valuations that their stocks currently enjoy in the stock market.

g) High taxes help the government finance the oil marketing companies which can then sell domestic cooking gas and kerosene at lower prices.

Each of these arguments is largely correct (I mean just because a small scale industry has emerged, doesn’t mean they are wrong) except for the last one. The subsidies on domestic cooking gas and kerosene are now down to around Rs 25,000 crore, which isn’t much in comparison to the petroleum subsidy of the past years. Hence, high taxes on petrol and diesel are clearly not required to fund the subsidy.

But there is one point that these economic commentators and analysts do not talk about. High taxes on the petrol and diesel makes the government lazy and helps it to continue favouring the status quo. Allow me to elaborate. It is worth remembering here that money is fungible. Just as high taxes on petrol and diesel allow the government to fund physical infrastructure, they also allow it to do a lot of other things that a government shouldn’t be doing. Let’s look at the points one by one:

a) Between 2010-2011 and 2015-2016, Air India has lost close to Rs. 35,000 crore, and yet it continues to be run. The losses are not surprising, given that the airline business is a very competitive business and the government clearly doesn’t have the wherewithal to run it. The question is where does the money to keep bankrolling Air India come from? The high taxes on petrol and diesel.
Lately, there has been talk of selling the airline. Let’s see, if and when that happens.

b) Or take the case of Hindustan Photo Films Manufacturing Company Ltd. It is the fourth largest loss-making company among the loss making public sector units. It made losses of Rs 2,528 crore in 2015-201 Between 2004-2005 and 2015-2016, the company has made losses of close to Rs 15,000 crore. As mentioned earlier in 2015-2016, the company lost Rs 2,528 crore. It employed 217 individuals. This meant a loss of Rs 11.65 crore per employee. Where does the money to run this company come from?

c) In total, high taxes on petrol and diesel allowed the government to run 78 loss making public sector enterprises in 2015-2016. Between 2011-2012 and 2015-2016, the loss making public sector enterprises have made losses of Rs 1,33,400 crore. Where is the money to finance these losses coming from?

d) Between 2009 and now, the government has spent roughly around Rs 1,50,000 crore, recapitalising public sector banks. The public sector banks have a humungous bad loans portfolio, as they keep writing off the bad loans, their shareholders’ equity keeps coming down and the government as the largest owner, needs to recapitalise them. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. Take a look at Table 1.

Table 1:


 Gross non-performing advances ratio
Indian Overseas Bank24.99%
IDBI Ltd.23.45%
Central Bank of India19.55%
UCO Bank18.83%
Bank of Maharashtra18.00%
Dena Bank17.39%
United Bank of India16.56%
Oriental Bank of Commerce14.49%
Bank of India14.20%
Allahabad Bank13.72%
Punjab National Bank13.20%
Andhra Bank12.91%
Corporation Bank12.14%
Union Bank of India11.77%
Bank of Baroda11.15%
Punjab & Sind  Bank10.80%
Canara Bank10.00%

Source: Author calculations on Indian Banks’ Association data.
As on March 31, 2017.

Table 1 tells us that 17 public sector banks have a bad loans ratio of 10 per cent or high. This basically means that of every Rs 100 of loans that they have given, a tenth or more, is not being repaid. The government currently owns 21 banks, after the merger of the associate banks of State Bank of India and the Bhartiya Mahila Bank, with the State Bank of India.

Some of these banks like the Indian Overseas Bank are in a particularly bad state. This bank has a bad loans ratio of close to 25 per cent i.e. one fourth of its loans have been defaulted on.

Where is the money to keep these banks going, coming from? In a world where money wasn’t free flowing because of high taxes on petrol and diesel, banks like the Indian Overseas Bank, UCO Bank, United Bank of India, Dena Bank, etc., would have already been shutdown or perhaps been sold off. These banks are too small on the lending front to make any substantial difference to the total lending carried out by banks in India. But their losses do hurt the government a lot. Every extra rupee that goes towards funding these banks is taken away from something more important areas like education, health and agriculture.

e) Also, given the different taxes implemented by different states, the price of petrol and diesel tend to vary across the country. Take the case of the government of Maharashtra charging a drought cess of Rs 9 every time one litre of petrol is bought in the state. Why is this cess even there during a time when there is really no drought in the state? It is just an easy way for the government to raise money. Most people don’t even know that they are paying for something like this, every time they buy petrol.

Hence, to introduce a sense of equality among citizens living in different states, petrol and diesel need to be taxed under the GST (They are already a part of it, with zero percent tax rates).

The high taxes from petrol and diesel also helps the government to continue running many inefficient firms as well as banks. Any plan of closing down these firms and banks is likely to met with a lot resistance and also, lead to a lot of hungama (for the lack of a better word). Given this, it makes sense for the government to take the easy way out, maintain the status quo and continue running these firms and banks.

As Donald J Boudreaux writes in The Essential Hayek: “People’s intense focus on their interests as producers, and their relative inattention to their interests as consumers, leads to press for government policies that promote and protect the interests of producers.”

Any idea of shutting down or selling an inefficient public sector enterprise or banks, is likely to be met with a lot of protests from the employees as well as the trade unions representing them. The political parties are likely to join in. Hence, it is easy for the government to maintain the status quo and not make any difficult decisions.

But the money that goes towards keeping these individuals happy, is taken away from other areas like education, agriculture, health etc. People who lose out because of this, do not have the kind of representation that people working for government run firms have.

Of course, all this does not mean that there should be no taxes on petrol and diesel. With the right to govern comes the right to tax people. But these taxes should be at a reasonable level. Also, with lower taxes, people will spend more money on personal consumption and that will help economic growth. And the impact of people spending money, on economic growth, is always greater than that of the government.

To conclude, it is worth remembering that every coin has two sides, and it doesn’t always land up heads.


A slightly different version of this column appeared on Pragati on September 19, 2017.