Oil prices still soaring- Government blames UPA’s oil bonds
Politics
Over the last few weeks, petrol prices have crossed INR 100 per litre in several Indian cities. As prices continue to soar, the Modi government is under increasing pressure to cut high taxes on fuel.
However, the government has cited the instrument of oil bonds issued by the UPA regime under former Prime Minister Manmohan Singh to justify its inability to reduce the high incidence of taxes on petroleum products.
Why are these bonds in the news?
Taxes account for 58% and 52% of the retail selling prices of petrol and diesel respectively. The government has so far been reluctant to cut taxes as excise duties on petrol and diesel are a major source of revenue, especially at a time when the pandemic has adversely impacted other taxes like corporate tax.
The Modi government has pointed out that the bonds issued by the Manmohan Singh government have weakened the financial position of the oil marketing companies and added to the government's fiscal burden now.
What are oil bonds? What is their purpose?
According to the RBI, a bond is a debt instrument in which an investor loans money to a corporate or government entity that borrows funds for a defined period of time at a fixed interest rate. In this case, oil bonds are issued by the government to compensate oil marketing companies (OMCs) for losses borne by them in the process of regulating prices.
They are akin to government securities. These usually have a long maturity period extending over 15-20 years. Interest payments will be due at fixed intervals during the tenure of the bond.
Why did the UPA government issue these bonds?
Before the complete deregulation of petrol and diesel prices, oil marketing companies were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price.
To compensate for the losses, the UPA government issued oil bonds to the companies amounting to INR 1.4 lakh crore between 2005 and 2010 instead of allocating fuel subsidies in the Union budget.
How much has the NDA government repaid?
When the NDA government took over in May 2014, the pending liabilities of oil bonds stood at INR 1,34,423 crores and by 2018-19, the same stood at INR 1,30,923 crores. This clearly indicates that the NDA government repaid only INR 3,500 crores.
Interest on oil bonds
The UPA and the NDA government have been paying oil bonds for the last 20 years. In its second term, the UPA government paid a total of INR 53,163 crore in interest for oil bonds in the five-year period between 2009-10 and 2013-14.
Whereas, the current NDA government paid a total of INR 40,225 crore between 2014-15 and 2017-18. The interest payment for 2018-19 was budgeted at INR 9,989.96. This means that both UPA-II and NDA-I have made an interest payment of more than INR 50,000 crores during their five-year tenures.
Conclusion
The Modi govt is under increasing pressure to reduce the rising oil taxes, but they are citing the instrument of oil bonds issued under UPA government to justify its inability to reduce taxes on petroleum products. On other hand, Congress is hitting back at the government and saying that oil bonds can not be the sole reason for the skyrocketing prices.
The Cred Conundrum
Startup
When you’re Kunal Shah, you don’t go to Venture Capitalists, they come to you and cut you a check even before you ask for it. That’s the halo you get after a USD 400 million exit. From Freecharge to now Cred, Kunal and his cashback centered businesses have been investor favourites, so much so that Cred raised its seed round when it was just an idea. But what is equally interesting is what seeded the idea of Cred in Kunal’s mind.
Eureka moment
Post Freecharge, Kunal’s time was spent travelling and studying developed nations. Self check-out counters at fuel stations meant the system trusted the people to do the right thing and pay for gas at the counter - this insight was his Eureka moment. He realized the benefits of “a frictionless environment", an environment that creates financial progress for its citizens, such that people trust the system. People trust the system because the system consistently rewards trustworthy and creditworthy individuals.
The habit loop: Neurology of habit formation
It takes 3 elements to inculcate a habit (i) cue, (ii) routine, and (iii) reward. China uses this to influence good behaviour at scale by ranking citizens with a “social credit” system where good behaviour is rewarded* and bad behaviour is punished. This is the reason why cashbacks and rewards work extremely well to keep the users on the platform and constantly transacting.
*Rewards include discounts on utility bills, insurance, healthcare, cheaper credit etc, whereas punishments include a ban on flight and train tickets, luxury hotels, reduced internet speed, inaccess to good schools and jobs
Credit Cards: Trojan horse for the affluent consumer
In a country where only 1.46 crore out of 130 crore people pay taxes (~1.1%), of which 1 crore report incomes in the INR 5-10 lakh bracket and only 46 lakh reported INR 10 lakh+ income - how to identify the creme-de-la creme? Being a credit card user meant that they would’ve comforted the issuer with either a payslip or a tax return and having a 750+ credit score became a signal of their good behaviour. Armed with the above insights, Kunal embarked on creating the gated community of affluent and top of the pyramid consumers called Cred, which now boasts 6 million users - courtesy IPL and their much talked about ads starring “Indiranagar ka Gunda”.
Monetizing a platform is the tough part...
When big tech giants allowed us to use their apps and platforms for free, we realised that “If you’re not paying for the product, you are the product.” Their scale and a pioneer advertising model made their monetization strategy relatively simpler - get advertisers to pay top dollar and keep the users engaged. Will Cred build revenue streams that don’t just justify its current USD 2 billion+ valuation, but show us signs of a potential USD 10 billion exit?
While it has tried products like…
RentPay, Cred Cash (Instant Credit), E-Commerce etc - none of them seem large enough to help Cred in its path to profitability. That being said, Kunal is a seasoned entrepreneur, which is what most investors have placed their bets on. Can he pull it off once again and deliver another par excellence exit. The only catch this time is that everyone knows Snapdeal had to sell Freecharge to Axis Bank at a 90% discount within 2 years of acquiring it, and thus Cred will be evaluated under a microscope by any potential acquirer.
Questions to ponder
Will Cred give investors an exit via IPO or a strategic sale?
What could be the Eureka moment for its monetization?
Is it really a community of affluent consumers or bargain shoppers?
Does the USD 2.2 billion valuation make sense?
Compared with INR 52 lakh in revenue in FY20, what could the IPL sponsor's revenue in FY21, FY25 and FY30?
Today’s Cartoon
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