Thinkpad: Let Go.
We have two words for you — let go.
First that message goes out to the government. Petrol now costs Rs 100 in some cities in the country. In others, it’s just below that. As BQ’s Sameer Bhardwaj reminded us this week, taxes account for about 55-60% of what consumers pay at the pump so costlier crude is only partly to blame. The rest is largely central and state taxes, he wrote.
Yes, this fact is not new. But, on the off chance, that it has slipped the mind of administrators, it merits repetition. Taxes were raised when prices were low. These increased excise duties on petrol and diesel were a key revenue buffer, adding about 0.7% of GDP in FY21. But now, as global prices rise and the economy opens up, retaining those high taxes makes little sense.
There are some suggestions on social media that this high taxation will help push India towards electric vehicles. On the slim chance that this logic is actually being pursed, decision makers may want to study the elasticity of demand for petrol and diesel. In 2018, BQ’s Pallavi Nahata had done this analysis using data since 2010. It showed that elasticity of diesel was well below 1 but petrol had greater elasticity of more than 1. However, petroleum policy veteran Kirit Parikh back then had explained that even that limited elasticity only plays out over time.
So a nudge towards EVs is fine but keeping fuel prices high to achieve that is more like a shove from the school bully.
In the near term, allowing petrol and diesel prices to rule this high will help you accomplish exactly what you don’t want — higher inflation and lower disposable spending power. Yes, there will be some impact on the budget math if excise duties are cut but perhaps the conservatism in broader revenue estimates will give the government some room.
So. Let go.
A similar note goes out to the Reserve Bank of India. We ended last week’s Thinkpad pointing out that the central bank had both the currency and bond markets on a short leash. The strategy is fraying at the edges. In the currency markets, the high forward premia persist, leading to carry trades. Jamal Mecklai explains what is happening in this useful read.
In the bond markets, another auction devolved this week and yields went back to 6.13% on the benchmark, partly driven by higher global yields as well. Beyond the benchmark, borrowing costs are rising too.
What will be the central bank’s next move? Let go a bit? With caution?
The RBI did let go in an entirely different way this week. It shed its grey-suit conservatism and donned a pair of dark glasses, a black suit and a gold tie. Literally. “Savdhanee jo hategee, durghatna ghate gee...” RBI told all of us who are great with punching in digital transactions but apparently not so great with sniffing out frauds.
Don’t miss this video. A for effort, RBI! Ditch the gold tie next time, though.
Till next week.