For decades now, one of the statements that has stood the test of time is, India is a poor country. Without going into absolute numbers such as size of GDP, per capita income etc, the aforementioned statement held true in 1947 and holds true even now in 2021. However, the question which naturally creeps into our minds, is “why”. We have got abundant natural resources, the best minds in the world, a large workforce, mainly fertile, plain topography. So, what are the limiting factors which are severe enough to outweigh the aforementioned substantial positives over such a long period of time?

One of such crucial limiting factors is the country’s propensity to guzzle oil (fossil fuel), a commodity where the domestic production is roughly 1/6^th of the domestic demand. However, the obvious question that arises is, Indian oil companies buy oil from abroad, Indian consumers pay for it and also pay excise duty for using the same. So, if the centre and state govts remove these duties, the average consumer will have more money in his pocket and therefore, be richer. So why doesn’t the central and state govts do the obvious thing and at least reduce these duties if not completely eliminate them?

To answer that, lets imagine a couple of situations where the Govt does precisely that and withdraws excise duty on petroleum.

Scenario 1: With all the excess liquidity, you decide to treat yourself with a visit to US or any European country. You reach your destination, you walk out of the airport, you are thrilled, so thrilled in fact, that you start feeling hungry. You see a fruit seller right outside the airport and go to have a banana. You feel so benevolent after eating the banana that you offer the seller a 500 rupee note (a considerable markup from the banana you have at home). But to your surprise, he refuses to accept it. He wants his country’s currency (USD or Euro or GBP) only. You realise that all the INR in your pocket doesn’t mean a thing and you rush to the Indian Embassy for help. However, the Embassy is also unable to help you, because not only you, but your country also doesn’t have USD or Euro or GBP anymore. 

Scenario 2: Instead of going for that foreign trip, you decide to buy a second car. After all, bank loans are favourable, petrol prices are down, so why not indulge yourself in a fancy new model you have been eyeing for some time now? You take your brand new car out for a spin, but suddenly you notice that there are a lot more cars on the road, much more traffic congestion, and you have to keep your car’s A.C. on at all times because of the pollution. Your average petrol consumption is also much worse than you anticipated due to the congestion. While you curse the govts for their apparent inability to widen the roads or create flyovers, petrol prices suddenly start going up because although there is no excise duty, the rupee has started depreciating much faster than you witnessed before.

Also Read: The Hypocrisy and Absurdity of Nobel Laureate Economist of Indian Origin

But why would either of these situations arise? To understand this, let us take a moment to understand the magnitude of India’s oil dilemma. India’s oil bill in FY 20 was ~USD 101 billion (roughly 2/3^rd of total trade deficit of ~USD 153 billion), i.e. approximately 7.5 lakh crore rupees or ~20% of India’s current foreign exchange reserves

For a country like India where imports are more than exports, foreign exchange reserves are crucial because they:

1. Provide confidence to markets that a country can meet its external payment obligations
2. Demonstrates backing of domestic currency by external assets
3. Limits external vulnerability by maintaining foreign currency liquidity to absorb shocks

The last point is especially crucial if you consider that India generally experiences a current account deficit which is, at times, partially funded by external borrowings. In simple terms, if a person’s salary is less than his expenditure in a particular month, then he might resort to paying some of the bills by credit card. Now imagine that person being in that situation for decades.

To put this further into context and historical experience, India’s current forex (foreign exchange) reserves are in stark contrast to India’s forex reserves of a measly USD 5.8 billion in March 1991 when India’s economy was under the stewardship of the “National Front” led by “Janata Dal”. And the chronology of the events before and after the debacle was as follows:

1. The forex reserves had started depleting sharply from the mid-80s due to a combination of trade and fiscal deficit
2. Since July 1990, due to the low reserves, INR depreciated sharply which exacerbated the problem
3. By the end of 1990, the Indian Forex Reserves could have covered only ~3 weeks’ worth of imports (as compared to 18 months reserves currently)
4. The Central Govt was unable to pass the budget after Moody’s downgraded India’s bond ratings and this inability to pass the budget led to further deterioration in the ratings. This led to incapacity to borrow short-term loans and finally, the Indian Govt had to mortgage their gold reserves to narrowly avoid defaulting on debt payments
5. The World Bank and IMF had also stopped their assistance forcing the govt (then under the stewardship of the Indian National Congress) to liberalise, privatise and globalise the Indian economy

How does the RBI maintain these foreign exchange reserves and why is it a loss-making proposition?

Going back to the original analogies of the two scenarios and financing one’s expenditure above income through debt, when the lender realises that its borrower will keep borrowing every year, the lender is likely to increase the interest rate steadily. This phenomenon somewhat reflects in the manner that the INR has steadily depreciated against the world currencies over the last few decades.

Since we are a net importing economy, we would always have to procure forex (especially USD). Let’s assume, to make import payments, we required 100 USD in 1991. And that the govt kept a reserve of 300 USD which the govt procured @ Rs. 23 per USD. So, the Govt takes out 100 USD from the 300 USD, makes the payment, and replenishes the reserve. Only now, those 100 USD is available @ Rs. 25 per USD.

Plus, with the increasing size of the Indian economy, even our imports are continuously increasing, which in turn requires the Govt to maintain higher reserves, which means more loss. Much of RBI’s efforts go towards minimising such losses by buying forex when rates are favourable. But that means further blocking of precious govt resources.

To add to it, the reserves themselves are held in such a manner that the risk is the lowest and hence the returns are the lowest.

All these factors ensure that the forex reserves, although absolutely necessary, are a continuous burden on the country’s already limited resources. Resources, which could have otherwise been used for various developmental projects like infrastructure, education, research & development etc, all of which, directly or indirectly, contribute to alleviating poverty.

What has the current government done to address the issue?

India’s demand for energy will only increase in the coming years and until and unless India miraculously discovers some major oil deposits, the import bill is not likely to come down. And to be able to maintain service that import bill, the govt will need to maintain or increase the forex reserves which will continue to be a loss making proposition, which will be funded out of the current or next generation’s pockets. Excise duty on oil constitutes to close to 20% of the Govt’s revenue receipts.

So, the Govt’s only option is to try for homegrown remedies, which are, alternate sources of energy like solar, wind and hydro energy.

Since alternate sources of energy in itself is a vast topic and this article has focussed on oil prices, let us understand the Govt Initiatives for reducing the oil consumption in the automotive sector and the impact of the same.

Electric Vehicles:

• The Electric vehicles market is currently less than 1% of the Indian Automotive Industry (in terms of yearly sales) and majority of the sales is towards two-wheelers and three-wheelers. Indian govt ambitiously has targeted to achieve 100% electrification of public transport and 40% electrification of personal mobility by 2030
• The major obstruction to growth has been availability and prices of lithium ion batteries (leading to much higher costs for EVs as compared to their petrol/diesel counterparts) and charging infrastructure. For charging infrastructure the roadblock is not only set-up costs but also running costs (a charging station will need to service ‘X’ number of vehicles to be charged to be viable) and charging time (full charge of a vehicle requires much more time as compared to filling oil)

Govt Action to promote EVs:

• According to a Mckinsey report in 2018, India will need ~50 lakh charging stations by 2030 and will entail investment to the tune USD 6 billion (around 45 thousand crore rupees). In Feb 2020, Govt gave in-principal nod to firms to set up 2600 charging stations. Currently, India is estimated to have around 1000 charging stations
• As brought out earlier, since charging stations will need ‘x’ number of vehicles to be viable, the growth in charging stations will move parallelly with demand. Now let us also note what the govt has done to boost demand

1. Since EVs are, on an average, 30-40% more expensive than petrol/diesel variants, the govt has reduced GST from 18% to 5%. In short, if a petrol car was costing you 10 lacs INR (post GST) and its EV variant 13.5 lacs INR, now it will cost 12 lacs INR
2. So, basically if your budget was 10 lacs INR, you have to shell out 2 lacs INR extra for an EV. Lets assume that to do that, you avail a loan. To support you there the Govt has come up with IT deduction under section 80 EEB whereby a person can claim Rs. 1.5 lacs on interest payments for the said loan. Lets assume you avail a 5 year loan @12% on those 2 lacs and you fall in the 20% tax bracket. Post IT refund, you will end up paying 50 thousand INR as interest, thereby making the cost of the EV exceed the petrol variant by ~25% as compared to our initial estimate of 35%
3. But for a major part of our population, even that 25% extra is a tad too much for various reasons, primary being budgetary restrictions. So what the Govt should ideally do, is to try and reduce the cost of the lithium ion batteries (which are the single largest cost component in EVs and mostly imported). Lets now understand Govt action and policies on the matter and the immediate impact:

1. In Nov 2020, GOI introduced the Production Linked Incentive (PLI) scheme for 11 sectors which consists of ACC Battery industry and High-Efficiency Solar PV Modules. Briefly put, GOI will give incentives for companies starting/ adding production in these sectors for a period of 5 years amounting to ~1.97 lac crores INR
2. As a result, in Dec 2020, TATA Chemicals started working on its lithium-ion cell manufacturing project. They will be bolstered by GOI’s discovery of 1600 Kg lithium mine in Karnataka (since lithium is a key component for these batteries and is mostly imported)
3. Even before the PLI scheme introduced in 2020, GOI has been active in increasing lithium-ion battery production in the country. In 2019, Automotive Electronics Power Private Limited (AEPPL), a joint venture between Toshiba Corporation, Denso Corporation, and Suzuki Motor Corporation, signed a Memorandum of Understanding (MoU) for an INR 4,930 crore expansion (in-two phase) investment in its upcoming lithium-ion battery production plant.
4. In 2019, India signed an MoU with Bolivia for the development and industrial use of lithium for the production of Lithium-ion batteries. As part of the MoU, Bolivia will support supplies of Lithium and Lithium carbonate to India and foster joint ventures for Lithium battery production plants in India.
5. In April 2019, the Department of Heavy Industry introduced the 2^nd phase of the FAME (Faster Adoption and Manufacturing of Electric Vehicles) with a budget of Rs. 10,000 crores as subsidy on commercial vehicles, public transport vehicles and two-wheelers.

Challenges in the EV strategy and steps taken to address them:

• In India, almost 70% of electric energy requirement is generated from coal. Although, unlike oil, India produces majority of its coal requirement domestically, for the EV strategy to work (especially from an environmental point of view), the renewable sector (especially solar energy) needs to be the major contributor for EVs
• However, for the solar energy market to develop, due to the inherent poor grid level power factor of solar power, it would require batteries to store the same. Hence, not only from a cost reduction point of view, India needs to produce its own batteries to have the desired impact on the economy as well as the environment
• GOI, in a bold move, has restricted the import of the solar cells, panels and inverters (which are required for production of solar energy) and is likely to impose such bans on import of lithium ion batteries to encourage manufacturers to produce the entire value chain locally (furthering the encouragement in the form of PLI as brought out before). While some experts have classified the strategy as foolhardy since the govt is trying to achieve in years what some countries have done in decades, GOI, is banking on the ingenuity of the Indian manufacturing sector to achieve the same. The proverbial carrot at the end of the stick would be the first mover advantage in such a vast untapped market   
• However GOI realises, despite its best efforts, the EV strategy may not pan out as hoped by 2030 (due to various factors well beyond its control). And also, high fuel prices have a far reaching impact on every section of the economy. So as a back-up/alternate plan, via its 2018 National Biofuels Policy, the Govt is also targeting to achieve an ethanol blending rate of 10% by 2022 and 20% by 2030 in crude oil (which has been brought forward to 20% by 2023). In Jan 2021, the target was brought forward by 5 years from 2030 to 2025. According to estimates, the current blending rate is around 8%. The Cabinet Committee on Economic Affairs (CCECA) in Dec 2020 approved an INR 8460 crore interest subvention scheme to increase ethanol production capacity. This will again reduce our dependency on fuel import, fuel prices and pollution levels

Conclusion:

The recent rise in fuel prices has attracted criticism for its inflationary pressures on the economy (in addition to other world market-driven inflationary pressures). Although the Indian population is likely to face budgetary concerns over the medium term, at this current juncture, this rise in fuel prices is likely to have a positive dominoes effect which will benefit the country in the following manner:

1. Consumers, who are planning to purchase new cars, will consider buying EVs inspite of the ~25% price differential as the upfront extra cost will be compensated by lower operating expenses for EVs (currently per km cost of EVs is less than 20% of its petrol and diesel counterparts and the gap will only grow as petrol and diesel prices rise)
2. This boost in demand will give further incentives for pick-up in lithium-ion battery and EV production and development of charging infrastructure
3. Apart from giving a boost to the economy in terms of GDP and employment growth, this will decrease the BOT deficit, which will impact the valuation of the INR vis-à-vis other currencies and reduce the requirement for maintaining forex reserves and make other imports cheaper
4. At a time when Global Warming is a bigger threat than any, the reduction in use of fossil fuels will be highly beneficial for our environment. Even increasing blending of ethanol will reduce our carbon footprint considerably.
5. Alternate sources of energy and its uses are the new future. After a long time, India will be almost at pace with the developments in this aspect with the developed economies. GOI’s intent on technological advancement and reducing carbon emissions can also be gauged in the manner they skipped to BS VI emission norms from BS IV despite of resistance from various segments of the automotive sector.

Energy, its availability, and supply has been the key for almost all major economies for centuries now. There have even been numerous wars which have been fought for the same. At a time when India is on the path to lay claim as a world superpower, energy management is crucial for the country’s ambitions.

Hence, the rise in fuel prices, albeit painful over the medium term, is likely to change consumer behaviour of Indian automobile buyers since now consumers have the option to move on from the fossil fuel (an option that wasn’t available/viable even 5 years back). And even if 10% of new buyers decide to make the transition, the EV industry will grow at geometric progression which will further boost the entire chain (charging infrastructure and battery production).

The Indian EV industry presently can be compared with a child who has just started walking, unsure, tentative initially, but just a few confident steps away from running around everywhere. One confident step that may support the industry is if the GOI, as a policy, ensures all govt offices (centre and state) and public sector enterprises purchase only EVs going ahead. It might be just the slingshot the industry needs to propel itself forward.

DISCLAIMER: The views expressed are personal.