Goal incongruence

Lower duty on gold, wider trust deficit

In her final budget for FY25 (presented in July 2024), the finance minister had cut the import duty on gold from 15% to 6%. No clarity was provided for this measure in the budget papers. It is widely speculated that the move was to help the RBI in augmenting its gold reserves and bring back its gold stock held with foreign custodians; and also lower the domestic gold prices to help the government to redeem the sovereign gold bonds at a lower price.

The move has resulted in higher consumer demand for gold, resulting in larger quantities of gold import having adverse impact on the current account balance. This is prima facie contrary to the intent of the government to encourage household savings to move away from physical assets like gold towards financial assets; and maintain a healthy current account balance to support INR and bond yields. The move dented the credibility of the government and widened the trust deficit a little more.

Cooking oil makes the path slippery

Just before the festival season began in India, the government raised import duty on edible oils in September. The duty on import of crude soybean oil, crude palm oil and crude sunflower oil to 20% from zero percent previously. The import duty on refined palm oils, refined sunflower oils and refined soybean oils was increased to 32.5% from 12.5% previously. The stated objective is to provide remunerative prices to the local producers. Much of this duty hike is likely to be passed on to the consumers in due course.

This move appears totally ad hoc - to lead the market prices for edible oil (hence oilseeds) higher than the MSP to lessen the burden on the government. Given the erratic weather seen in most of the country in the past 3-4 years, it is highly unlikely that many farmers could be motivated enough to sow a fragile oilseed crop.

Most experiments with palm farming in the country have yielded sub-optimal results anyways. This move is likely to result in (i) higher and sticky food inflation burdening the already stressed consumers; (ii) stronger motivation for adulteration in edible oil; and (iii) higher working capital requirement and lower margins for edible oil producers.

The better course would have been to help the farmers partner with local manufacturers, provide financial, technology and input support (like green revolution), achieve higher oilseed production on a sustainable basis and make the imports redundant.

CGDs – pushing the chicks out of nest

The government has cut allocation of cheap APM (administered price mechanism) gas supply to the city gas distributors (CGDs), which sell CNG as alternative vehicle fuel and PNG as alternative cooking fuel. The allocation has been by ~40% in two tranches in October and November 2024. Though it is early to assess the entire impact, it is broadly estimated that these cuts are likely to result in ~40% of cheap USD 6.5/mmbtu APM gas being replaced with expensive gas costing USD10-14/mmbtu. Much of this higher cost is expected to be borne by CGDs, while some of it may be passed on to the consumers.

This reduction in the level of protection to the CGDs could be seen as a precursor to the complete privatization of the city gas distribution business. The existing CGD firms are mostly in the public sector. These may either be privatized and made to compete with the private sector without any protection.

It would be interesting to see whether (i) gas distribution business follows the trajectory of telecom, where the consumer emerged a clear winner and multiple operators (including state owned MTNL and BSNL) went bankrupt; or (ii) a private sector oligopoly emerges which would squeeze customers to maximize profits.

Regardless, in the short term we may see some trouble for CNG/PNG customers. The queues at CNG pumps may become longer, and expansion of piped gas to households may slowdown. This is definitely not congruent with the dire need for a cleaner fuel to check severe levels of air pollution in many cities.