Category: Oil | Page 2

3 September, 20203 September, 2020

Winter and Money Printing are Coming to India, In a Few Months

The Controller General of Accounts publishes the state of government finance at the end of every month. This data is published with a gap of one month. Hence, on 31st August, the data as of 31st July, was published.

This data, not surprisingly, doesn’t make for a good reading. The fiscal deficit, the difference between what a government earns and what it spends, for the period April to July 2020 stood at Rs 8.21 lakh crore. The fiscal deficit that the government had plans to achieve during the course of the current financial year (2020-21) stands at Rs 7.96 lakh crore. Hence, at the end of July, the actual fiscal deficit of the government was 103.1% of the budgeted one.

But given the state we are in this is hardly surprising. Nevertheless, there are several reasons to worry. Let’s take a look at it pointwise.

1) Tax collections have collapsed. Between April and July 2020, the gross tax revenue, which brings in a bulk of the money for the central government and which it shares with the state governments, is down 29.5% to Rs 3.8 lakh crore, in comparison to the same period in 2019.

Let’s look at the different taxes collected by the government between April and June this year and the last year.

They all fall down

Source: Controller General of Accounts.

As can be seen from the above chart, the collections of all major taxes are down big time.

Take the case of central goods and services tax. (GST) or the part of GST that ends up with the central government. During April to July 2019, the total collections of the central GST had stood at around Rs 1.41 lakh crore. During the same period this year the collections have fallen by 34% to Rs 92,949 crore. Other taxes have fallen along similar lines.

The fall in GST collections is a reflection of a massive slowdown in consumption. A slowdown in consumption ultimately reflects in a slowdown in income of individuals as well as incomes of companies. Ultimately, one man’s spending is another man’s income.

But there is something that the above chart does not show, the excise duty collections of the central government. They are up year on year by 23.8% to Rs 67,895 crore. This despite the fact that the consumption of petroleum products between April and July is down 22.5% in comparison to 2019.

So, how have excise duty collections gone up? The central government has increased the excise duty on petrol from Rs 22.98 per litre to Rs 32.98 per litre. The excise duty on diesel has been raised from Rs 18.83 per litre to Rs 31.83 per litre. Also, a substantial part of this duty is a cess, leading to a situation where the central government does not have to share the revenue earned through the cess with the state governments.

In the process, the central government has captured a bulk of the fall in oil prices.

2) As mentioned earlier, the central government needs to share a part of the money it earns with state governments. Between April and July it shared Rs 1.76 lakh crore with states, against Rs 2 lakh crore, during the same period last year. This is 12% lower, during a time when the states are at the forefront of fighting the covid-epidemic.

The ability of the state governments to raise taxes, after having become a part of the goods and services tax system, is rather limited. Take the case of petrol and diesel. The central government has raised excise duty by such a huge extent that the state governments aren’t really in a position to raise the value added tax or the sales tax on petrol and diesel, which they are allowed to charge, without having to face political repercussions for it.

3) The central government has more ways of raising money than the states. One such way is disinvestment of its stakes in public sector enterprises. This year the government plans to earn a whopping Rs 2.1 lakh crore through this route. The original plan included the plan to sell Air India. Whether that happens in an environment where the airlines business has been negatively rerated in the aftermath of covid, remains to be seen.

The other big disinvestment plan was that of the government selling its stake in the Life Insurance Corporation of India through an initial public offering. There are one too many regulatory hurdles that need to be removed, before a stake in India’s largest insurance company can be sold to investors. Long story short, it looks highly unlikely that the government will get anywhere near earning Rs 2.1 lakh crore this year, through the disinvestment front.

Having said that, the government can always resort to some accounting shenanigans, like getting one public sector enterprise to buy another, and pocketing that money. This is likely to happen in the second half of the year.

Over and above this, the government earns a lot of money from the dividends that it earns from public sector enterprises as well as banks and financial institutions. The target for this year is around Rs 1.55 lakh crore. Public sector banks will continue to remain on a weak wicket through this year, hence, their ability to pay dividends is rather limited.

The only way the government can make good this target is by raiding the balance sheet of the RBI for money. Also, the government is likely to raid the cash balances of public sector enterprises which have them, by asking them to pay special dividends.

4) The money that gets invested into various small savings schemes, which includes schemes like Post Office Savings Account, National Savings Time Deposits ( 1,2,3 & 5 years), National Savings Recurring Deposits, National Savings Monthly Income Scheme Account, Senior Citizens Savings Scheme, National Savings Certificate ( VIII-Issue), Public Provident Fund, KisanVikas Patra and Sukanya Samriddhi Account, net of the redemptions, is a revenue entry into the government budget.

This time it has been assumed that the government will get Rs 2.4 lakh crore through this route. Between April and July, Rs 38,413 crore or just 16% of the targeted money has come in. Last year, during the same period, 38% of a much lower target of Rs 1.3 lakh crore had been achieved. Clearly, this target is also going to be missed.

5) Of course, the government understands this and which is why in early May it increased its borrowing target from Rs 7.8 lakh crore to Rs 12 lakh crore, by more than 50%. The government borrows money to finance its fiscal deficit.

What this means is that the government wants to at least keep the fiscal deficit to around Rs 12 lakh crore. The question is will that happen? Gross tax revenues are already down 30%. Of course, as the economy keeps opening up, this number will look better. Having said that, even if tax revenues are down by 15% as of the end of the year, we are looking at a shortfall of Rs 2.5 lakh crore for the central government. The other big entries of disinvestment and the net-revenue from small savings schemes, are also looking extremely optimistic in the current situation.

Even if the government achieves a fiscal deficit of Rs 12 lakh crore and the economy shrinks by around 10% this year, we will be looking at a central government fiscal deficit of 7% against the targeted 3.5%.

In this scenario, it is now more than likely that the RBI will resort to direct financing of government expenditure by printing money and buying government bonds. The government sells bond to finance its fiscal deficit.

This isn’t to say that the RBI hasn’t printed money this year. It has. But it has chosen to operate through the primary dealers. But the mask might come off in in the time to come and the RBI might decide to buy bonds directly from the government.

Winter and money printing are coming to India, in a few months.

19 September, 2017

What You Pay For When You Pay for Fuel

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 Bank	24.99%
IDBI Ltd.	23.45%
Central Bank of India	19.55%
UCO Bank	18.83%
Bank of Maharashtra	18.00%
Dena Bank	17.39%
United Bank of India	16.56%
Oriental Bank of Commerce	14.49%
Bank of India	14.20%
Allahabad Bank	13.72%
Punjab National Bank	13.20%
Andhra Bank	12.91%
Corporation Bank	12.14%
Union Bank of India	11.77%
Bank of Baroda	11.15%
Punjab & Sind Bank	10.80%
Canara Bank	10.00%

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.

4 January, 2016

Happy new year folks: The govt has increased excise duty on petrol and diesel again!

Dear Reader,

While you, me and everybody else was busy celebrating the new year, the government quietly increased the excise duty on petrol and diesel, again. This increase was announced on January 1, 2016 and came into effect from the next day.

This is the seventh increase in the excise duty on petrol and diesel since November 2014. Also, the government has increased the excise duty thrice in quick succession over the last two months (between November 6, 2015 and now). Since November 2014, the excise duty on unbranded petrol has gone up by Rs 6.53 per litre, with latest increase being of 37 paisa per litre. This is a massive jump of 544%.

During the same period the excise duty on unbranded diesel has gone up by Rs 6.37 per litre or 436%, with the latest increase of Rs 2 per litre. In the process, the government has captured a major part of the fall in oil prices.

On November 11, 2014, when the excise duty on petrol and diesel was increased by the Narendra Modi government for the first time, the price of the Indian basket of crude oil was at $79.11 per barrel. As on December 31, 2015, the price of the Indian basket of crude oil stood at $32.9 per barrel, a massive fall of 58.4% since November 2014.

In the same period the price of petrol and diesel in Mumbai has fallen by only 3.6% and 9.9% respectively. What this tells us loud and clear is that the government has captured most of the fall in oil prices, without passing on the benefit to end consumers. The surprising thing here is that there has been no protest on this, either from the opposition parties or the citizens.

There are a number of issues that crop up here. First comes the question, why is the government doing this? In fact, there is a clear trend in the government increases of the excise duty on petrol and diesel. In 2014-2015, the last financial year, the increases came on November 11, 2014, December 2, 2014 and January 1, 2015. These increases were in the period close to the annual budget which is presented in end February.

The same trend is playing out this time as well. The three recent increases have come on November 6, 2015, December 16, 2015 and January 1, 2016. In the run up to the budget which will be presented in end February 2016, the government is sprucing up its finances. Estimates suggest that the three recent increases will bring in an extra Rs 10,000 crore into the coffers of the government.

In the budget presented in February 2015, the government had targeted a fiscal deficit of Rs 5,55,649 crore or 3.9% of the gross domestic product(GDP). Fiscal deficit is the difference between what a government earns and what it spends.

It is important to figure out how this calculation was carried out. In 2014-2015, the nominal GDP was at Rs 12,653,762 crore. Nominal GDP is essentially GDP which hasn’t been adjusted for inflation. It was assumed that during 2015-2016, the nominal GDP would increase by 11.5% to Rs 14,108,945 crore. A fiscal deficit of Rs 5,55,649 crore amounts to 3.9% of this projected GDP of Rs 14,108,945 crore.

So there are two things that the government needs to keep track of here. The absolute fiscal deficit as well as the nominal GDP. The trouble is that the nominal GDP hasn’t grown at the projected rate. The nominal GDP for the first six months of the financial year (April to September 2015) has grown by only 8.2% instead of the projected 11.5%. And this has thrown the fiscal deficit calculations of the government for a toss.

As the Mid-Year Economic Analysis released in December 2015 points out: “It is true that the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP. Slower-than-anticipated nominal GDP growth (8.2 percent versus budget estimate of 11.5) will itself raise the deficit target by 0.2 percent of GDP.”

In order to ensure that it meets the fiscal deficit target, the government has increased the excise duty on petrol and diesel thrice in the last three months. On November 6, 2015, when the first of the three increases came in, the price of the Indian basket of crude oil was at $45.07 per barrel. Since then it has fallen to $32.9 per barrel, a fall of 27%. Hence, every time there has been a fall in oil prices, the government has moved in and increased the excise duty.

What this tells us is that on the finance front, the government has essentially turned out to be a one-trick pony. The easy money that the government has managed to raise from falling oil prices has led to a situation where it has totally given up on all other measures to spruce up its revenues as well as cut its expenditure.

The loss making public sector units continue to operate as they had in the past. The government continues to own stakes in companies like ITC, Axis Bank and L&T, worth thousands of crore.

The irony is that the government spends a lot of money in telling people that consumption of tobacco is injurious to health and at the same owns a 11.17% stake in ITC through the Specified Undertaking of the Unit Trust of India. How do the finance minister Arun Jaitley and prime minister Narendra Modi explain this dichotomy? (Like P Chidambaram and Manmohan Singh before them).

Jaitley has also talked about a stable tax regime in the past to woo foreign investors to invest in India. How about offering the same stable tax regime to the Indian consumer as well?

The Indian economy as well as the government finances have benefitted a lot during the course of this year due to falling oil prices. Sajjid Chinoy, chief economist at JP Morgan India, has estimated that lower oil prices gave a 1.3 percentage points boost to growth in the last four quarters.

The question is will this continue? If it doesn’t, does the government have a Plan B in place?

What will happen once oil prices start to rise? How will the government finance its expenditure? Will the government be able to maintain the excise duty that it is currently charging on petrol and diesel and allow their respective prices to rise? If the government raised excise duty in an era of falling oil prices, it is only fair that it cuts excise duty when oil prices are going up?

To conclude, falling oil prices have made the Modi government lazy on the revenue raising front. And that is clearly not a good sign as we enter 2016.

The column originally appeared on The Daily Reckoning on January 4, 2016.

16 December, 2015

Shale vs crude: Why oil prices are on a free fall even as Opec members suffer

The latest price of the Indian basket for crude oil was at $35.72 per barrel. It has fallen by 16% over the last one month and by 33% since end December 2014.
Yesterday, the Brent crude oil was selling at $37-38 per barrel. Lower quality oil is selling at even below $30 per barrel. As Amrbose Evans-Prtichard writes in The Telegraph: “Basra heavy crude from Iraq is quoted at $26 in Asia, and poor grades from Western Canada fetch as little as $22. Iran’s high-sulphur Foroozan is selling at $31.”

What has led such low levels of oil price? Over the last one year, the Organization of the Petroleum Exporting Countries(OPEC), an oil cartel of some of the biggest oil producing countries in the world, has been flooding the market with oil in order to make the shale oil being pumped in the United States, unviable. Pumping shale oil is an expensive process and is not viable at lower oil price levels.

In fact, the oil ministers of the OPEC countries met in early December and they pretty much decided to continue doing things the way they have been up until now, over the last one year. In the past, any likely slowdown in oil prices was met with oil production cuts within the OPEC. That hasn’t happened over the last one year and isn’t happening now either.

As the International Energy Agency(IEA) points out in its monthly oil report for December 2015: “OPEC’s decision to scrap its official production ceiling and keep the taps open is a de facto acknowledgment of current oil market reality. The exporter group has effectively been pumping at will since Saudi Arabia convinced fellow members a year ago to refrain from supply cuts and defend market share against a relentless rise in non-OPEC supply.”

The rise in the supply of non-OPEC oil has primarily happened on account shale oil being pumped in the United States and to some extent in Canada, over the last few years. In order to make companies pumping shale oil unviable, OPEC has been relentlessly pumping oil. As the IEA monthly report points out: “OPEC supply since June has been running at an average 31.7 million barrels per day, with Saudi Arabia and Iraq – the group’s largest producers – pumping at or near record rates. Riyadh has held supply above 10 million barrels per day since March to satisfy demand at home and abroad while Iraq, including the Kurdistan Regional Government (KRG), is doing its level best to keep production above the 4 million barrels per day mark first breached in June.”

Also, as oil prices have fallen, OPEC and non-OPEC oil producing countries have had to pump more and more oil, in order to ensure that their governments have some money going around to spend. As the Russian finance Anton Siluanov told Ambrose. “There is no defined policy by the OPEC countries: it is everyone for himself, all trying to recapture markets, and it leads to the dumping that is going on.”

Further, sanctions against Iran are likely to be lifted early next year and more oil will then hit the international oil market. The Financial Times quotes an oil trader as saying: “It seems the Iranians are fulfilling the requirements for the lifting of sanctions faster than expected.” said one London-based oil trader.

The IEA monthly report expects the extra oil from Iran to add 300 million barrels to the already swelling oil inventories. In fact, the November 2015 oil report of the IEA had put the total global stockpiles of oil at 3 billion barrels.

So how long will this last? Given the number of factors that impact the price of oil, predicting which way it will head, has always been tricky business. As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Prediction: “Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

Nevertheless, it seems that one year down the line the Saudi strategy of driving down the price of oil, in order to drive down non-OPEC oil production seems to be working. As the IEA oil report points out: “There is evidence the Saudi-led strategy is starting to work. Lower prices are clearly taking a toll on non-OPEC supply, with annual growth shrinking below 0.3 million barrels per day in November from 2.2 million barrels per day at the start of the year. A 0.6 million barrels per day decline is expected in 2016, as US light tight oil – the driver of non-OPEC growth – shifts into contraction.”

Also, it is worth pointing out here that oil exporting countries are having a tough time balancing their budgets. The fiscal deficit of Saudi Arabia has touched 20% of its gross domestic product (GDP). Fiscal deficit is the difference between what a government spends and what it earns. As Evans-Pritchard puts it: “Opec revenues have collapsed from $1.2 trillion a year in 2012 to nearer $400 billion next year.”

Hence, it is safe to say that the OPEC strategy of driving down the price of oil is hurting the member countries. Given this, the price of oil cannot be at such low levels for much long. But at least in the short run, the oil price will continue to stay low.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on December 15, 2015

15 December, 2015

Oil@35: The govt has captured most of the oil price fall

In the column published on December 10, I had discussed why the oil price has been falling and is now below $40 per barrel. Data from the Petroleum Planning and Analysis Cell (PPAC) shows that the price of the Indian basket of crude oil as on December 11, 2015, was at US$ 35.72 per barrel. In the last one month the price of oil has fallen by around 16%.

In the column published on December 10, I discussed the reasons behind the falling oil price and why the trend is likely to continue at least in the short run. In today’s column I will discuss how falling oil prices will impact India.

The biggest beneficiary of lower oil prices is the government. The oil marketing companies sell certain oil products like kerosene and domestic cooking gas at below the cost price. The government subsidises them for this. In the budget for this financial year, the government had assumed a total subsidy of Rs 30,000 crore. This included Rs 22,000 crore subsidy for domestic cooking gas and Rs 8,000 crore kerosene subsidy. There are no under-recoveries on petrol and diesel anymore.

Oil prices have fallen by close to 35% since the beginning of this financial year. Given this, chances are that the Rs 30,000 crore allocation towards oil subsidy should work just fine. In the past, the government used to share the total under-recoveries occurred by oil marketing companies at various points of time during the course of the year.

From what I could gather looking at government press releases, this practice seems to have been stopped since the beginning of this financial year. If the total under-recovery number on the sale of kerosene and cooking gas was available, I could have said with greater confidence that the Rs 30,000 crore put aside for oil subsidies would be enough. (The point again shows how difficult it is in India to do write stuff based on data).

Hence, with oil prices falling, the total expenditure of the government should remain under control. In the past, with rising oil prices, the government ended up under-budgeting for under-recoveries. This led to higher expenditure, a higher fiscal deficit and higher borrowing to finance the fiscal deficit. This is unlikely to happen this time around. Fiscal deficit is the difference between what a government earns and what it spends. A higher fiscal deficit pushes up interest rates as the government borrows more and this is not good for the economy.

Further, the government hasn’t passed on the benefit of falling oil prices to the end consumers. The price of petrol in Mumbai as on April 2,2015, was Rs 67.53 per litre. Currently petrol sells at an almost similar price of Rs 67.55 per litre.

During the same period the price of the Indian basket of crude oil has fallen by close to 35%. The price as on April 2, 2015, was $54.77 per barrel. By December 11, 2015, the price had fallen to $35.72 per barrel. The same is true for diesel as well. The price of diesel in Mumbai as on April 2, 2015, was Rs 55.69 per litre. Currently, it retails at Rs 53.09 per litre or around 4.7% lower.

The government has captured much of this gain by increasing the excise duty on petrol and diesel. Excise duty collections between April and November 2015 are up by a whopping 67% to Rs 1,70,693 crore. Much of this jump has come from an increase in excise duty on diesel and petrol.

In fact, a series of tweets by revenue secretary Dr Hasmukh Adhia gives more clarity on this front. Adhia said that the total indirect taxes between April and November grew by 34.3% to Rs 4,38,291 crore. Customs duty, service tax and excise duty, together make up for indirect taxes.

The increase has primarily come from “the excise increases on diesel and petrol, the increase in clean energy cess, the withdrawal of exemptions for motor vehicles, capital goods and consumer durables, and from June 2015, the increase in Service Tax rates from 12.36% to 14%.” If these increases are discounted for then the increase in indirect taxes was at 10.3%, Adhia tweeted.

Getting back to oil. Earlier this year the investment bank Goldman Sachs said that there is less than 50% chance that oil prices will drop to as low $20 per barrel. If that were to happen, it would be great if the government passed on the gain to the end consumers as well, instead of trying to capture all the gain for itself.

My guess is that the government will try and capture the gains from any further fall in the price of oil as well. This ‘easy money’ will allow the government to go easy on other fronts. This will mean that the government will continue to subsidise loss making companies like MTNL and Air India. No hard decisions will be made on this front. Further, the disinvestment of public sector companies will take a backseat, as it already has, on the pretext of the stock market not doing well.

Theoretically falling oil prices should also push down the fuel bill of companies. But as the recently released data on the performance of non-financial private corporate business sector during the second quarter of 2015-16 (July- September 2015) by the Reserve Bank of India shows, that is clearly not happening. The power and fuel costs of Indian companies (a sample of 2,711 companies) went down by just 4.2%, despite the price of oil falling much more. The reason for this lies in the fact that the government hasn’t passed on this fall in price to the end consumer.

India imports close to 80% of the oil that it consumes. Given this, any fall in price of oil is beneficial to the country. Any fall in oil prices means that we will be paying fewer dollars for the oil that we import. And this means that our oil import bill will come down. That’s the good bit.

On the flip side, India is also a big exporter of oil products (we refine oil and export oil products). In October 2014, oil products were India’s biggest export at $5.73 billion. Since then with a fall in the price of oil, oil products have become India’s third largest export at $2.46 billion in October 2015. Hence, while falling crude prices are beneficial on the import front, they hurt on the export front as well.

The column originally appeared on The Daily Reckoning on December 15, 2015