The Rs 90,000 crore Consumer Spending Kicker That the Govt Missed Out On - Vivek Kaul's Diary
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The Rs 90,000 crore Consumer Spending Kicker That the Govt Missed Out On

Mar 22, 2016

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The Narendra Modi government has increased the excise duty on petrol and diesel nine times since November 2014.

This has ensured that the benefit of falling oil prices has not been totally passed on to end consumers in the form of lower petrol and diesel prices. What has not helped is that the state governments have also increased their share of taxes on petrol and diesel and ensured that the benefits of lower oil prices have not been totally passed on to the citizens of this country.

A press release put out by the Bhartiya Janata Party in February 2016 said that all state governments except Mizoram, Assam, Tamil Nadu, Chhattisgarh and Gujarat, had increased the value added tax on petrol and diesel.

Hence, the increase in excise duty on petrol and diesel, is not the only reason for an increase in the price of petrol and diesel.

Having said that, what would have happened if the benefit of lower oil prices had been totally passed on to the end consumers in the form of lower petrol and diesel prices? Dr Soumya Kanti Ghosh, the chief economic adviser of State Bank of India, has done an interesting calculation on this.

As he writes in a recent research note titled If Wishes Were Horses: "Even though international oil prices are at a decade low, yet Government has increased excise duty both in petrol and diesel. So, we made an attempt to calculate total savings of the consumers if Government would not have hiked the excise duty on petrol and diesel products."

So what does Ghosh's calculation tell us? As he writes: "By removing only additional central excise duty from petrol and diesel retail selling prices, the hypothetical petrol price per litre would be Rs 47.63 (Actual: Rs 59.63), and diesel would be Rs 38.96 a litre (Actual: Rs 44.96)...If we assume that the consumption of petrol and diesel in FY16 of 95.28 MMT (Apr-Jan: 79.4 MMT), this would have translated into Rs 90,000 crore of savings for the consumers, which could have provided additional demand in the economy to the extent of 1% of GDP....In effect, this means that if wishes were horses, the decline in oil prices in itself may have provided the much needed impetus to demand and we may not have to wait for the pay hikes!" (MMT = million metric tonnes).

This means that if the central government wouldn't have increased the excise duty on petrol and diesel, consumers would have benefitted to the tune of Rs 90,000 crore. This money would have been spent and pushed up consumer demand to the extent of 1% of GDP. And that would have been a huge thing. As is well known the multiplier effect of consumer spending is significantly better than that of government spending, where leakages are huge.


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Of course, if the government did do things along these lines, it would have meant that the fiscal deficit of the government would have gone up. The fiscal deficit is the difference between what a government earns and what it spends. If the government gave up taxes to the tune of Rs 90,000 crore (actually lesser than this, but I will come to it), it's earnings would have fallen, leading to an increase in its fiscal deficit.

Actually, the increase in fiscal deficit would be lower than Rs 90,000 crore. This is because the increase in consumer demand due to excise duty on petrol and diesel not being raised, would also bring in some money to the government in the form of both direct and indirect taxes.

Further, there were other ways through which the government could look at bringing down its fiscal deficit. For starters, it owns 11.19% stake in the cigarette maker ITC. This stake as on March 21, 2016, was worth a little over Rs 29,600 crore. Why does the government, which runs anti-tobacco advertisements, continue to own a cigarette maker? (I know I keep repeating this point like a broken record).

This stake could have been sold and a significant portion of the increase in fiscal deficit could have been covered. Those who like to support the government on all issues like to point out that ownership of shares of ITC brings in a dividend for the government. Hence, why let go of this regular income?

The question to ask here is what is the dividend yield of ITC? The dividend of ITC is 1.7%. Dividend yield is the total dividend the company has paid out during the year divided by its current market price. The dividend yield of ITC is less than half of the return of 4% available on a savings bank account. Given this, the dividend argument clearly does not work.

Also, the government continues to run many loss making companies. The Economic Survey for 2015-2016 released before the budget points out that public sector enterprises have accumulated losses of Rs 1.04 lakh crore. The government keeps bearing these losses. And the funny thing is that some of these losses are not even a part of the budget.

As economist Jaimini Bhagwati recently wrote in the Business Standard: "Funds will be provided to support continued losses in public sector undertakings including Indian Railways, some of which are not part of the Budget."

If these loss making companies are shut down and their assets (primarily land) gradually monetised, it will tremendously benefit the government. The government has made some noises along these lines.

As the finance minister Arun Jaitley said in his budget speech: "A new policy for management of Government investment in Public Sector Enterprises, including disinvestment and strategic sale, has been approved. We have to leverage the assets of central public sector enterprises(CPSEs) for generation of resources for investment in new projects. We will encourage CPSEs to divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects." Let's hope this doesn't just end up as a paragraph in a finance minister's speech.

The disinvestment target at the beginning of the year was set at Rs 69,500 crore. Only Rs 25,312.60 crore was achieved. Hence, if the government had made an effort to earn money through these routes, it wouldn't have had to increase the excise duty on petrol and diesel, nine times since November 2014.

Also, it needs to be pointed out here is that not all the savings on account of lower petrol and diesel prices, on account of government not raising the excise duty, would have translated into consumer spending.

Some of it is bound to have found its way into bank accounts and other financial savings instruments. Even that is a good thing given that household financial savings have been falling over the years.

In 2007-2008, the household financial savings had stood at 11.2% of the gross domestic product (GDP). By 2011-2012, they had fallen to 7.4% of GDP. Since then they have risen marginally. In 2014-2015, the household financial savings stood at 7.7% of GDP.

A higher household financial savings ratio would have worked towards lower interest rates over the long term. Further, the government may not have been able to fund the entire shortfall of Rs 90,000 crore through these ways. Nevertheless, a good portion could have been filled in through the methods highlighted above.

This means that the government would not have had to increase the excise duty nine times. Possibly, four or five times would have been enough. Nevertheless, making money by simply raising excise duty on petrol and diesel was the easy way out, and who doesn't like to take the easy way out.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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5 Responses to "The Rs 90,000 crore Consumer Spending Kicker That the Govt Missed Out On"

Somanathan M

Mar 22, 2016

The assumption by Dr.Ghosh that 90,000 crores saving passed to consumer would have created a additional demand is not correct. For a domestic petrol or diesel user, passing the benefit of fallen crude price to means a savings of average Rs.500/month to 1000/month, this amount is not going to shift his/her spending. A individual shall prefer to save rather than spending.

Like (1)

Suresh Kabra

Mar 22, 2016

1. It is absolutely lob sided analysis. I am not an economist nor a scholar, but I know that only owners of 2 & 4 wheeler would have got benefited by reduction in fuel prices. But they are minuscule as compared to bulk users of fuel, such as private & public tpt companies, rly, airliners, shipping cos & industries etc. As a car owner I feel that both state & central govts have done injustice to me by increasing VAT & excise duty & not passing benefit to me. But I know for sure that fares of autos/bus/rly/airlines etc would not have come down. They would have made more profits & find ways & means for not paying tax to govt on addl profit. In other word, it would have generated more black money. Industries would do the same. Rarely such benefit is passed on to consumers in Toto. Do you still feel that this would have translated into Rs 90,000 crore of savings for the consumers like you & me or some rich & very rich people would have cornered all the profit & stash it away in foreign banks. Do increase in fiscal deficit would be lower than Rs 90,000 crore as envisaged by the economist adviser of SBI. I often wondered why PSU banks do not perform as well as private sect bks. Now it is clear. They make policies to benefit a few influential people rather than govt/bk which pay their salary.
2. More important, what happens after a couple of yrs when crude rise back 100$ level. There will be strike bus/auto owners all around for fare increase. Hence common men would be the ultimate sufferer. I am happy with govt policy even though it pinches me, because the nation is the gainer not a few rich people.

Like (3)

Balakrishnan R

Mar 22, 2016

Dear Mr. Vivek,
I appreciate the expression of Rs 90,000 Crores collected by Government by means by Excise duty. I am not supporting it; but the other side is if they have not increased the duty, the petrol and diesel consumption might have gone up. In late 1970s and early 1980s government increased excise duty just to curb petrol and diesel consumption. If government used this Rs 90,000 crores to reduce the Balance of Payment or paying externally borrowed money, it would be nice. Can you provide some light on this.
With regard to government holding shares on ITC, as you know, now-a-days, ITC is not in cigarette making alone. It is a diversified company. I am not supporting the government holding in ITC. But, my point it is not in loss. In around 2010, the price of ITC was about Rs 225. After 1:1 Bonus issue, the current price is Rs 320. It is equivalent to Rs 640 (if bonus not provided). This gives an appreciation of 184 % (in 6 years time). This is in addition to annual dividends. Hence, holding ITC share may not be at loss. Plus government may be getting other benefits by means of discounts in ITC hotels and other products.
Government should work on closing down of loss making and concerns.
Instead of wasting time on who is eligible for cooking gas subsidy. It should slowly increase the price of gas by about Rs 5 per month (similar to diesel price increase of Rs 0.50 per month done earlier by earlier government)to match the ruling price. Thus saved subsidy may be used for interconnecting rivers and creating check dams and ponds so that water for drinking and irrigation is made available. This will increase the earnings of farmers. You may kindly write on this topic. As we have read in school days, all the good rulers have done this plus building roads and planting trees.

Like (3)

N Nagaraja rao

Mar 22, 2016

We need sharp thinkers in the Government. Somebody who thinks out of the box.
Alternately they can pool people who think differently and use their talents, irrespective
of their political leanings.That calls for a lot of guts which is lacking in our leaders.
We need good statesmen and today very few politicians qualify for that tag. Today's leaders
are not innovators. They mimic the advanced countries and take the easy route.Thus they encourage
chumchas. Had chumchagiri been abolished we would not have landed in the NPA SOUP

Like (3)

R Varadarajan

Mar 22, 2016

I totally agree with this point. Disappointingly the Govt's priorities seem to be misplaced. Instead of this they plan to discourage saving through reduction of rate of interest on saving instrument, and consequent reduction of interest on borrowing, with a hope to prop higher production. This appears to be far fetched. The lack of growth is not due to domestic demand - but mainly due to fall in export, due international monetary issues which are to be solved. This approach seem to something like giving tons of ice cream to someone having severe cold & cough.

VARADARAJAN

Like (3)
  
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