Know the feeling where you were expecting a raise and end up with a pay cut instead? Yes, the double whammy when both future expectation and past conditioning gang up to gong you on your thick head like a mugger in a Brooklyn back alley. Or is it ?
At least that`s what the current excise hike of Rs. 1.5/litre seems like to most ‘normal’ people. As discussed earlier here, global oil prices have been on the slippery slope to US$ 80 a barrel from their hallowed perch of beyond US$ 100. That has resulted in six back to back reductions in fuel prices since August. The heightened expectation about lower prices was just people wanting more of this less business.
However, the audience will be happy to know, that far from a tragedy, this twist is actually good for our economy. And how exactly is that? For very long, our government has played the populist messiah, doling out oil subsidies like Facebook rolls out privacy invading measures. Which meant that when oil prices were high, the government (thats French for you – the taxpayer) absorbed it and when they were lower, they cut prices. Antics which lead to a bloated fiscal deficit, and an emancipated country.
This government on the other hand is doing what any sensible person would do – save for a rainy day ! And God knows we as a country have enough of those. The additional Rs. 14000 Crores that the excise duty will mop up can be used to reduce debt, thus interest rates.
But, wait a minute, you right wing jumper to obvious conclusions – don`t high fuel prices literally fuel inflation too ? Yes, but unlike Kim Kardashan, inflation is not inflamed only due to one thing. As you may know, inflation in India is more supply push than demand pull. Which means that higher interest rates cause higher interest payouts which cause higher prices since companies that make things need to pay banks that make loans.
So how does an excise duty cut reduce interest rates for companies ? Hmm. The most indebted Indian is not Vijay Mallya despite popular perception. It is in fact the Government of India. What the hell, since we are busting popular perceptions lets bust another one too. You would accuse the government of being many things but not of being credible or creditworthy, right ? Wrong. Due to a certain John Maynard Keyne, our economic systems automatically consider (non Greek) governments less of a credit risk than any private (i.e. non government) organisation. Thus your friendly neighbourhood Shylock banks would rather lend to the government than to you. Which means the only way to get them to lend to you or your company is to pay them more interest than what the government is willing to pay.
Ok, so ?
So, if the government returns Rs. 14,000 crore to banks and doesn’t want to borrow it back, it does two things. One, the bankers have money to lend without lending which they will not make their fancy bonuses. Two, the governement coffers are in a better state which causes bond yields to go down, thus reducing the general interest rates. Put the One and Two together and average folk like you and me get easier access to funding.
So, tomorrow when you are scowling at the pumpwallah when tanking up, know that the Rs.1.5 extra may just save you 1.5 percent on your next car loan interest rate. Now, thats good for you in a way that green tea can seldom claim to be.