Indians, Be Prepared! Petrol-Diesel Prices Are Likely to Stay High

light-diesel-oil-250x250

The price of petrol in India is at a four-year high. The price of diesel is at an all time.  And from the looks of it, petrol/diesel prices are unlikely to go down any time soon.

Narendra Modi took over as the prime minister of India in May 2014. The average price of the Indian basket of crude oil during the course of the month was $106.85 per barrel. Petrol was sold at Rs 80 per litre in Mumbai and Rs 71.41 per litre in Delhi. Diesel was being sold at Rs 65.21 per litre and Rs 56.71 per litre respectively, in the two cities.

Cut to March 2018. The average price of the Indian basket of crude oil is much lower at $63.80 per barrel. Petrol, as on April 3, 2018, is being sold at Rs 81.84 per litre in Mumbai and Rs 73.99 per litre in Delhi. Diesel is being sold at Rs 69.06 per litre and Rs 64.86 per litre, respectively, in the two cities.

The average price of crude oil in March 2018 was 40.3% lower than it was in May 2014. But the price of petrol and diesel, which are products made out of oil, is higher now than it was in May 2014.

What explains this? One reason lies in the fact that the rupee has depreciated against the dollar. One dollar was worth around Rs 58-59 in May 2014. In March 2018, it is worth Rs 64-65.

This basically means that Indian importers of oil have to pay more in terms of rupees for the dollars that they need, to buy oil. Hence, to that extent petrol and diesel will be costlier. But this still does not explain.

At Rs 59 to a dollar, one barrel of the Indian basket of crude oil would have cost around Rs 6,304 in May 2014. At Rs 65 to a dollar, one barrel of oil would have cost around Rs 4,147 per barrel in March 2018. Even after adjusting for the depreciation of the rupee against the dollar, oil was around 34.2% cheaper in March 2018 in comparison to May 2014.

So, what explains the fact that petrol and diesel are now costlier than they were when Modi first came to power?

The retail price of petrol and diesel, constitutes taxes collected by the central government, the respective state government where they are being sold, as well as the dealer commission.

Let’s consider the situation in Delhi in May 2014. The retail selling price of one litre of petrol as mentioned above was Rs 71.41 per litre. The price before dealer commission and taxes was Rs 47.12. This meant that Rs 24.29 per litre was collected as dealer commission and taxes. Of this, Rs 2 made for the dealer commission. Rs 10.39 was the tax collected by the central government. Rs 11.9 was the tax collected by the state government. The dealer commission and taxes constituted 34% of the retail selling price of petrol.

Now let’s cut to March 2018. The retail selling price of petrol as on March 19, 2018, in Delhi, was Rs 72.19 per litre (this is the latest data available). The price before dealer commission and taxes worked out to Rs 33.78 per litre. This basically means that Rs 38.41 per litre was collected as dealer commission and taxes. Of this Rs 3.58 was the dealer commission. Rs 19.48 was the tax collected by the central government and Rs 15.35 was the tax collected by the state government. The dealer commission and taxes constituted for around 53% of the retail selling price of petrol.

Basically, between May 2014 and now, the dealer commission and taxes in total have gone up by 58.1% (in Delhi). A similar dynamic has played out in other parts of the country as well. The same logic holds for diesel as well. In fact, dealer commission and taxes made up for 21.5% of the diesel price in Delhi, in May 2014. As on March 19, 2018, it made up for 43.2% of the retail selling price.

What has happened here? The central government and the state government, since 2014, have captured a bulk of the fall in the price of oil, by increasing taxes on petrol and diesel. While the average price of the Indian basket of crude oil was $106.85 per barrel in May 2014, it had fallen to as low as $28.08 per barrel in January 2016. A commiserate fall in petrol and diesel prices did not happen.

One of the major policy decisions of the Modi government when it first came to power was to increase the excise duty on petrol and diesel. Along similar lines, the state governments also quietly raised taxes on petrol and diesel.

In an ideal world, when the consumer did not receive the full benefit of falling oil prices, he should at least be protected a little from high prices of petrol and diesel. But that is unlikely to happen, given that the central government is not making as much money through the Goods and Services Tax (GST), as it expected to.

How is the GST linked to this?

For 2018-2019, the government expects to collect Rs 6,03,900 crore as central GST. This amounts to Rs 50,325 crore per month, on an average. In the month of March 2018, when the collections for February 2018 were made, the central GST collected amounted to Rs 27,085 crore (Rs 14,945 crore  was collected as central GST + Rs 12,140 crore was the central government’s share in the integrated GST). This is way lower than what the government has projected in the annual budget.

Unless, central GST numbers improve, the total revenue collected by the government will be under pressure in 2018-2019.

In this scenario, when the government is already under pressure on the revenue front, it is highly unlikely to decrease taxes on petrol and diesel, and help the end consumer. If it does so, there will other costs that will have to be paid for, right from a rising fiscal deficit to a higher interest rate.

As far as the international price of oil is concerned, there are way too many factors influencing it at any point of time, to make a reasonable prediction about it. Having said that, one factor that needs to be kept in mind is the up-coming initial public offering (IPO) of Saudi Aramco, the biggest oil company in the world.

The IPO is being billed as the biggest IPO in the world and is likely to unveiled by the end of June 2018, newsreports suggests.

In this scenario, it is highly unlikely that Saudi Arabia will allow the price of oil to fall from these levels, until the IPO is pushed through. The Indian basket of crude oil has seen a largely upward trend since June 2017.

Long story short, Indians need to be prepared for a period of high petrol and diesel prices.

The column originally appeared in the Quint on April 3, 2018.

The Trouble with Economic Forecasting is…

PricingSometime in May last year, I wrote a column for a digital publication, in which I said that the Modi government’s luck on the oil front would run out in 2015-2016. As is wont in such cases, I was more than a little vague about exactly when would the Modi government’s luck on the oil front run out.

I was just trying to follow an old forecasting rule: “forecast a number or forecast a date, but never both”. So, I sort of forecast a date. Honestly, I was wrong about it. The Narendra Modi government’s luck on the oil front continued through 2015.

Nevertheless, things have started to heat up in the recent past. Since February 12, 2016, the price of the Indian basket of crude oil has gone up by around 75%. As on May June 2, 2016, the price of the Indian basket for crude oil was at $46.83 per barrel.

This isn’t a column on trying to defend, what was a largely wrong forecast. What I want to explore in this column is the basic point about forecasting being a very difficult thing to do. While it’s always easy to explain things in retrospect, it is very difficult to predict how things will play out. And it is even more difficult to predict when things will play out, the way you expect them to play out.

Let’s take the basic forecast of oil prices going up. I was right about the point that when oil prices start to go up, the luck on which the good fortunes of the Modi government are built will start to run out. I will not explain it again here, given that I have explained it, often enough in the past, and perhaps might do it again, in the days to come.

Nevertheless, I got the timing wrong, despite making a very open ended forecast. There are two basic points to making a forecast—one is you expect the trend to continue—the other is you do not expect the trend to continue.

I expected that the trend of lower oil prices would not continue. While I have been right about that, but I have been wrong about the timing.

But what about forecasts, where economists and analysts, expect a trend to continue. Take the case of what economist Arvind Panagariya wrote in India—The Emerging Giant, a book that was published in 2008: “India has been growing at an average annual rate exceeding 6 percent since the late 1980s. During the four years spanning 2003-2004 and 2006-2007, its growth rate reached 8.6 percent—a level close to that experienced by the East Asian miracle economies of the Republic of Korea and Taiwan during their peak years. As the book goes to press, fears that the economy is overheating can be heard loudly, but virtually no one is predicting a significant slowdown in the growth rate in the forthcoming years.”

Panagariya, like most economists, did not see the financial crisis, coming. He also, like most economists, thought the current trend would continue. But that did not turn out to be the case. Also, most economists find it easier to say what other economists are saying. This is because if and when they are wrong, then they are wrong in a majority.

And it is safe to be wrong when everyone else is wrong. Nevertheless, if one economist forecasts something which goes against the trend and is wrong about it, then only he has to bear the consequences of being wrong. Life is easy, when everyone is wrong, and hence it makes sense to go with the herd.

Let’s take another example here of the economist Milton Friedman and the prediction he made when the price of oil started to go up in the early 1970s.

In January 1974, the Organisation of Petroleum Exporting Countries(OPEC) raised the price of oil to $11.65 per barrel. This was after OPEC’s economic commission had determined that the price of oil should be $17 per barrel.

It was around then that the economist Milton Friedman wrote in a col­umn in the Newsweek magazine where he predicted that “the Arabs … could not for long keep the price of crude at $10 a bar­rel.” For this prediction, Friedman was awarded the Booby Prize by the Association for the Promotion of Humour in International Affairs
The price of oil was quoting at more than $18 a barrel by the end of 1979. And by early 1981, it had risen four-fold and was quoting at nearly $40 a barrel. Friedman had been proven wrong for a long period of time.

In 1986, finally the price of oil was quoting again at $10 a bar­rel. And Friedman wrote a “I told you so” column in an issue of the Newsweek magazine which appeared on March 10, 1986. The column was titled “Right at Last, an Expert’s Dream.” This, of course, was in jest. As Friedman confessed, “Timing, as well as direction, is important…I had expected the price of oil to come down far sooner.”
Now does that mean that it makes sense to go against the herd? I wish I could say that. Over the last few years, a huge number of gold bugs have been coming out of the woodwork and predicting that gold prices will rise again. While, gold has done reasonably well in the recent past, a sustained rally in the yellow metal hasn’t been seen as yet.

So, next time you hear an analyst or an economist, make a forecast, with great confidence, it might be worth remembering that old saying in economics: “economists have predicted nine out of the last five recessions”.

The column was originally published on June 7, 2016

Why oil prices have fallen by 63% and petrol prices by only 17%

light-diesel-oil-250x250One good news for the Indian economy during this financial year has been the huge increase in indirect tax collections. Customs duty, excise duty and service tax together form the indirect taxes collected by the central government.

Data released by the ministry of finance earlier this month showed that indirect taxes as a whole have grown by close to 36%, during the course of this financial year (April to October 2015). The accompanying table provides a breakup of the different kinds of indirect taxes collected during the course of this financial year.

Indirect Tax Collection:  April- October 2015

(Rs. in crores)

Tax Head

 

 

B.E.

2015-16

For OctoberUp-to October% of BE achievement
2014-152015-16% Growth2014-152015-16% Growth
 Customs208336

 

168001899813.110483112244816.858.8
Central Excise*228157

 

135692255066.28758814768568.664.7
Service Tax209774

 

125281714336.88937911272726.153.7
 

Total

 

646267

 

 

42897

 

58691

 

36.8

 

281798

 

382860

 

35.9

 

59.2

*Exclusive of cess administered by other departments.

What is interesting is that customs duty, central excise duty as well as service tax collected have grown at very good rates. The increase in the collection of indirect taxes between the end of 2013-2014 and the end of 2014-2015 had been just 9.1%. Also, the government failed to meet the indirect tax target of Rs 6,24,902 crore in 2014-2015. It managed to collect only Rs 5,42,325 crore.

Also, the indirect taxes collected during the course of this year up until now indicate that the government seems all set to meet its target of Rs 6,48,418 crore. This target is an increase of 19.6% in comparison to the indirect taxes collected during the last financial year.

Given that the indirect taxes collected have grown by 35.9% this year, meeting the indirect taxes target for this year, should not be a problem at all. As finance minister Arun Jaitley said earlier this month: “One of the greatest positives I can see is a huge increase in indirect tax revenues.”

The question is how genuine and sustainable is this massive growth in indirect taxes. As the ministry of finance press release put out earlier this month points out: “These collections reflect in part increase due to additional measures taken by the Government from time to time, including 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%. However, stripped of all these additional measures, indirect tax collections increased by 11.6% during April-October 2015 as compared to April-October 2014.”

Once we take these factors into account the rise in indirect tax collections is a much muted 11.6%. To be honest, the finance minister Jaitley acknowledged this recently.

The 68.6% jump in central excise duty is the main reason behind the massive jump in indirect tax collections. In fact, the jump in excise duty makes up for close to 60% of the overall jump in the indirect taxes collected this year.

This jump has primarily come due to the government increasing the excise duty on petrol and diesel five times between last year and now. In fact, the latest increase in excise duty on petrol and diesel came about earlier this month.

With these increases in excise duty on petrol and diesel, the government has more or less fully captured the fall in oil prices for itself, and not passed it on to you and me. A litre of petrol currently costs Rs 68.13 per litre in Mumbai. It was at Rs 80 per litre around the time, Narendra Modi was elected to power in May last year.

Between then and now, the petrol price has fallen by just 17.4%. In comparison, the price of the Indian basket of crude oil has crashed by 63%. On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude oil was $108.05 per barrel. On November 16, 2015, the price was at $39.89 per barrel.

This clearly shows that the government has captured almost all the benefit of falling oil prices. A 63% fall in the price of oil has led to just a 17% fall in the price of petrol in Mumbai.

There are multiple problems with this approach.

The government talks about having dismantled the administered price mechanism on the pricing of petrol and diesel. But that is clearly not the case. A fall in oil prices does not immediately lead to a fall in petrol and diesel prices. The government has captured the fall by increasing the excise duty on petrol and diesel.

Further, the government has become heavily dependent on the revenue coming in from an increase in excise duty on petrol and diesel. What will it do if and when the oil price starts to go up? Will it cut the excise duty in order to ensure that price of petrol and diesel does not rise? Given that it did not pass on the benefits of a fall in the price of oil to the end consumer, isn’t it only fair that it shouldn’t be passing on the increase as well?

Also, it is worth remembering here that trying to forecast the price of oil remains 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.”

Further, if it cuts the excise duty, as and when the oil price goes up, it will have to borrow more and that will create its own set of problems. The fiddling around with excise duty on petrol and diesel, shows a lack of a stable policy on the tax front. The finance minister Arun Jaitley has often outside India talked about a stable tax regime for foreign investing in India. Why forget us Indians, who live in India?

Another impact of this massive increase in indirect tax collections has been the junking of the disinvestment programme, though no politician will admit to the same. At the beginning of the year, the government had set a disinvestment target of Rs 69,500 crore. But that is not going to be achieved. Meanwhile, the government will continue to waste the taxpayer’s hard earned money on dud companies like MTNL and Air India. Minimum government and maximum governance will continue to remain a slogan.

On the good side, the fiscal deficit number will look better than 3.9% of GDP it was projected at, in the budget document.

The column originally appeared on The Daily Reckoning on November 18, 2015

 

Busted: The ‘biggest’ myth about Indian exports

3D chrome Dollar symbolOne of the economic theories (I don’t know what else to call it) that often gets bandied around by almost anyone who has anything to say on the Indian economy, is that India’s economy is not as dependent on exports as the Chinese economy is. Honestly, given that China and the word “exports” are almost used interchangeably these days, it sounds true as well. Nevertheless, that is clearly not the case. While this may have been true in the 1990s, the most recent data does not bear this out.

Let’s look at exports of goods and services as a proportion of the gross domestic product (GDP, a measure of the size of the economy) of both these countries. In 1995, the Chinese exports to GDP ratio had stood at 20.4% of the GDP. The Indian exports to GDP ratio was around half of that of China at 10.7% of the GDP.

In 2014, the Chinese exports to GDP ratio had stood at 22.6% of the GDP. On the other hand, the Indian exports to GDP ratio was at 23.6% of the GDP. Hence, as a proportion of the size of the economy, Indian as well as Chinese exports are at a similar level. And that is indeed very surprising. It is not something that one expects.

As Rahul Anand, Kalpana Kochhar, and Saurabh Mishra write in an IMF Working Paper titled Make in India: Which Exports Can Drive the Next Wave of Growth?: “India’s exports have been increasing since the early-1990s – both as a share of GDP and as a share of world exports. Total exports as a share of GDP have risen to almost 25 percent in 2013 from around 10 percent in 1995. Likewise, Indian goods exports as a share of world goods exports have risen, with the share almost tripling to 1.7 percent during 1995-2013. A similar trend is visible in India’s services export – the share tripling to over 3 percent of world service exports during 2000-2013.” Computer services form around 70% of India’s services exports, which forms around one third of India’s total exports.

What these data points clearly show us is that the theory that India is not dependent on strong exports for a robust economic growth, is basically wrong, as exports now amount to nearly one-fourth the size of the Indian economy.

The Indian exports have been falling for the last nine months. In August 2015, the exports were down by 20.7% to $21.3 billion. Twenty three out of 30 sectors  monitored by the ministry of commerce saw a drop in exports in August 2015, in comparison to August 2014. Exports for the period of April and August 2015 stood at $111 billion and were down by 16.2% in comparison to the same period last year. Hence, there has been a huge slowdown in exports during the course of this financial year as well.

A major reason for the same has been a fall in commodity exports. As Chetan Ahya and Upasana Chachra of Morgan Stanley write in a recent research note titled What is Driving the Sharp Fall in India’s Exports?: “Persistent downward pressure from commodity prices has undoubtedly put pressure on commodity export growth (in value terms). Indeed, commodity exports (including oil), which account for 33% of India’s total exports, have been declining since Jul-14.”

Commodity prices have been falling because of a slowdown in the Chinese economic growth. China consumes a bulk of the world’s commodities.
Not many people would know that refined petroleum oil, much of which is exported out of the state of Gujarat, forms around one fifth of India’s exports.

Hence, while India benefits immensely due to a fall in the price of oil, given that we import 80% of what we consume, there is a flip-side to it as well.
Further, in India’s case, export of services, in particular computer services, has played a major role in driving up the exports over the years. The same cannot be said about India’s manufacturing exports. As Anand, Kochar and Mishra point out: “[India’s] services exports, as a share of total exports and in terms of sophistication, are comparable to high income countries, the share of manufacturing exports and their level of overall value content are still low compared to its peers, especially in Asia.”

The reasons for this are well discussed. They include an unpredictable tax regime (which the government keeps promising to correct), complicated labour laws and land acquisition policies, inspector-raj and a shaky physical infrastructure.

And this best explains why unlike China, India’s manufacturing exports are not a major part of its goods exports. As Anand, Kochar and Mishra point out: “For example, in 2013, manufacturing exports accounted for 90 percent of total exports in China, almost double the share during 1980-85. Indian exports have also undergone transformation during the decade of high growth, though to a lesser extent compared to peer emerging markets. The share of manufacturing in total merchandise exports has increased to 57 percent in 2013 from 41 percent in 1980.”

Also, given the problems an entrepreneur faces in India, in getting a manufacturing unit going, India’s share in global goods exports may have plateaued as far back as 2012. Data from Morgan Stanley suggests that India’s good exports as a proportion world goods exports has plateaued at around 1.7%.

As Ahya and Chachra of Morgan Stanley point out: “India’s market share in exports of goods for which we have monthly data has declined marginally over the last 12 months but has remained largely flat since 2012…The structural bottlenecks in the form of inadequate infrastructure, outmoded labour laws, a cumbersome taxation structure and systems, and poor ranking in terms of overall ease of doing business are probably making it harder to make gains in market share at a time when external demand has been weak and excess capacities in competitor economies have rise.”

And this is something that cannot be set right overnight.

The column originally appeared on The Daily Reckoning on Sep 28, 2015

Random ruminations on acche din and oil price

narendra_modi
One of the more interesting books that I have read this year is Humphrey B Neill’s
The Art of Contrary Thinking. The book was first published in the early 1950s and remains in print till today. One of the things that Neill talks about in the book is propaganda. Propaganda is essentially the official communication of a government to the public, which is designed in a way so as to influence public opinion.
As per Neill, propaganda that is “brought down to the level of a school child” works the best. Take the case of George Bush Junior and the American attack on Iraq. The American government propaganda(along with some help from the British) justified the attack on the ground that Iraq had weapons of mass destruction, which the country never did.
As Tim Vanech writes in the introduction to Neill’s book: “governments who wish to go to war prepare their case and go about manipulating the masses into required support.” The American government manipulated its masses by putting out the story of weapons of mass destruction in Iraq to justify the attack. The story worked because it was so simple that even a “school child” would have understood it—the Americans were the good guys going out there to save the world by killing the bad guys in Iraq. And who doesn’t want to listen to and believe in such a heroic tale?
In fact, all communication that works is normally very simple and is dumbed down to a level of a school child. Take the case of Narendra Modi’s election slogan — “
Achche din aane waale hain, hum Modi ji ko laane waale hain.” The fact that the slogan was as simple as it was, was a major reason for its success.
In an economic environment which was extremely negative because of high inflation and slow economic growth, the positive slogan caught the imagination of the nation. Neill quotes another writer Gustave Le Bon, who wrote
The Crowd: A Study of the Popular Mind, as saying: “Given to exaggeration in its feeling, a crowd is only impressed by excessive sentiments”. And the “excessive sentiments” in acche din aane waale hain influenced voters across large parts of India.
In fact, the slogan was not even original. It was lifted from Franklin Roosevelt’s election slogan in the 1932 US presidential elections “
Happy Days Are Here Again.” The 1932 election was fought when the Great Depression was at its worst, and Roosevelt’s slogan offered a lot of hope to people and it worked. Roosevelt won and continued to remain President till 1945 (those were days when the two term limit for a US president did not apply).
What worked for Roosevelt, worked for Modi as well and in the 2014 Lok Sabha elections, the Bhartiya Janata Party won 282 seats. The slogan worked because the people believed in it. They believed that “happy days” were about to come. And Modi like a quintessential politician never explained anything, but promised everything. But all that was nearly one year ago. What the “
acche din” slogan also did was that it set the bar very high for Modi. And now one year later, whenever anything negative happens, people are likely to ask (and are asking): “kahan hain acche din? (where are the happy days?)”
A Facebook friend recently wrote about his experience of visiting a petrol pump and the petrol pump attendant asking him: “
sahab kahan aaye ache din? (Sir, where are the good days?)” He was referring to the price of petrol and diesel having gone up over the last one month. Petrol prices in Mumbai have gone up by more than 11% since mid April to a little over Rs 74 per litre.
And this is where the
acche din slogan is likely to cause problems for the government if oil prices keep going up in the months to come. The price of the Indian basket of crude oil has gone up by 52% since mid January 2015. As on May 15, 2015, the price of the Indian basket was at Rs 4,097.73 per barrel.
When the oil prices were falling between May 2014 and January 2015, people close to the government even credited this fall in price to Narendra Modi. As a February 2015 editorial
in the Business Standard had pointed out: “The president of the ruling party, Amit Shah, for example, repeatedly took credit on the campaign trail for lower prices, as did the Union home minister, Rajnath Singh. Even the prime minister has mentioned lower fuel prices, though he has specified that it is because of his “luck”.”
In some conversations that I had (along with some material shared over the social media) I realized that many people seemed to believe, that the Modi government has brought down petrol and diesel prices.
Those who believed that the government was responsible for bringing down the price of petrol and diesel, will now ask—if the government can bring down the price of petrol and diesel, it can also ensure that their prices do not go up. And they will also ask, “
kahan hain acche din?” if prices continue to go up.
In fact, things are likely to get difficult for the government as and when the price of petrol and diesel crosses the May 2014 level. In May 2014, the price of diesel in Mumbai was Rs 65.21 per litre and that of petrol was Rs 80 per litre. If oil prices maintain their recent rise these levels will be breached very quickly.
The government can control this price rise by cutting the excise duty on petrol and diesel. Since October 2014, the government increased the excise duty on petrol and diesel four times. This was done to spruce up the revenues of the government and control the burgeoning fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends. What it also meant was that a dramatic fall in the price of oil was not passed on to the end consumer.
Once the petrol and diesel prices cross the May 2014, the pressure on government to control their price will go up. What will not help is the fact some of the top BJP leaders (Modi and Smriti Irani to name two) used the social media extensively in the years running up to May 2014, to criticize the petrol and diesel price hikes carried out by the Congress led UPA government. Also, Bihar elections scheduled for later this year will play a role on this front as well.
My guess right now is that if the oil price continues to rise, the government will have to start cutting the excise duty on petrol and diesel, if they want to ensure that people don’t start asking: “where are the
acche din?”. Let’s see how this goes.

The column appeared on The Daily Reckoning on May 19, 2015