The ‘convoluted’ economics of pulses in India.


The kharif crop sowing season is on. The ministry of agriculture declares regular data on this front every week. The latest data suggests that as on June 23rd 2017, the area sown under pulses stood at 5.97 lakh hectares. By the same time last year, the area sown under pulses had stood 9.01 lakh hectares. Hence, this year has seen a drop of close to 34 per cent, as far as area sown under pulses is concerned. The question is why? While deciding on how much area to allocate to a particular crop, farmers basically look at the price they received for it, the last time they produced and sold it. On that front, the record of pulses hasn’t looked good in the recent past. Look at Figure 1.

Figure 1: 

lefttop00Figure 1 plots out the inflation and recent deflation (a fall in prices) of pulses over the last few years. In December 2015, the price of pulses had gone up by 49 per cent in comparison to December 2014. This rate of price rise fell in the months to come, but remained in and around 30 per cent. While this made pulses unaffordable for the common man, the indication it sent out to farmers was to plant more pulses because that is where money was to be made. Take a look at Figure 2. It plots the total production of pulses over the years.

Figure 2: 

In 2016-2017, the production of pulses went up by 37 per cent to 22.4 million tonnes. This was the highest production of pulses in India ever. The farmers were expecting a good price for it, but what they got was exactly the opposite. The price of pulses crashed. Take a look at Table 1. It has the details of the prices received for different kind of pulses across different mandis in India.

Table 1: Price Movement for major pulses in Major Domestic Markets (in Rs/gtl) 

As is clear from Table 1, the price of different kinds of pulses except for chickpeas, has fallen in comparison to the last year. Tur dal or pigeon pea has been hit in particular, with prices in March 2017, falling by close to 45 per cent across different mandis.

This is not surprising given that Tur dal production went through the roof this year. Take a look at Figure 3, which plots the production of Tur dal over the years.

Figure 3: 

As can be seen from Figure 4, the production of tur dal in 2016-2017 jumped by close to 80 per cent to 4.6 million tonnes. This massive increase in production was primarily in response to a massive jump in price in 2015-2016. With the massive increase in supply in 2016-2017, the prices of tur in particular, and pulses in general, have crashed.

The central government declares the Minimum Support Price (MSP) for 23 crops, including rice and wheat. While the government declares the MSP for 23 crops, it procures only rice and wheat directly from the farmers, using the Food Corporation of India as well as state procurement agencies. Recently, the government has started to procure pulses as well, in the hopes of being able to offer a reasonable price to farmers.

But given the poor procurement mechanism in place, the price of pulses in many places, fell below its MSP. As a February 2017 report in The Times of India points out in the context of the state: “The MSP for tur dal is Rs 5,050 per quintal, but farmers are getting only Rs 4,200-4,300 per quintal.”

Some sort of stability could have been provided to these falling prices, if the government through its various agencies would have bought pulses at the MSPs it had announced. But given the recent start in procurement of pulses, the government agencies are not in a position to procure much. In 2016-2017, the total procurement of pulses by various government agencies stood at 1.1 million tonnes. This amounted to around 4.9 per cent of the total production of pulses. As the Price Policy for Kharif Crops-The Marketing Season 2017-18 points out: “Procurement of pulses is about 1.1 million tonnes as on 21.03.2017, much higher than earlier years but market prices are still ruling below MSP in some states. Therefore, there is a need for effective involvement of states in procurement of pulses. However, infrastructure of NAFED and SFAC [two of the agencies that procure pulses] needs to be strengthened with administrative and financial support to take up procurement of pulses on a substantial scale throughout the country.”

NAFED has had multiple problems regarding procurement of pulses, from a shortage of gunny bags, to running out of space due to a bumper crop. Having said this, procurement by the government isn’t really a long-term solution. What is needed is the development of a proper market system, where farmers can get the best prices for their crops. This of course, is easier said than done. While, Indian politicians like to flirt with market economics in many areas, the moment it comes to agriculture, they tend to clamp up.

Also, what has not helped is the fact that imports of pulses have continued unabated. Between April 2016 and January 2017, a total of 6.1 million tonnes of pulses had been imported. In 2015-2016, a total of 5.8 million tonnes of pulses had been imported. Hence, more pulses were imported in the first nine months of 2016-2017 than the year before that. The trouble was that in 2016-2017 along with a jump in imports, the production of pulses also went up by 37 per cent. If the import of a commodity is allowed, it’s export should be allowed as well.

While this brought down the price of pulses in the short-term, it sent out the wrong economic signals to farmers who had planted pulses in 2016-2017. And given this, the current financial year has seen the area sown for pulses fall dramatically by more than a one-third, in response to the recent crash in the price of pulses. As far as the plantation of pulses in kharif season goes, there is still some time to go and these numbers can change.

But if they don’t, then the total production of pulses through 2017-2018, will be lower than the bumper crop in 2016-2017. This, of course, will send the prices of pulses up all over again. Indeed, this is worrying for a nation where the consumption of protein is going up. Pulses remain the best source of protein for the vegetarian part of the population.

This pretty much summarises the way the ‘convoluted’ economics of pulses works in India.

The column originally appeared on Equitymaster on June 27, 2017

Of Exams, Luck and the Paradox of Skill


In last week’s column, I wrote about the role that luck, skill and hard work, play in exams. In this column, I plan to get into a little more detail on the issue.

Over the last few years, the media has made it a habit to splash the pictures of toppers of competitive exams as well as board exams (10th and 12th standards). Other than the fact that any sort of success needs to be recognised, such columns make for an inspirational read, particularly in cases where the toppers come from a poor family.

When it comes to competitive exams (from engineering exams to UPSC exams), there are magazines which interview toppers, in the hope of finding out the formula for success, so that their readers can benefit. And typically, most such news stories and interviews have more or less standard reasons being offered for success. These are hard work, family support and following a regular routine.

Of course, topping exams needs hard work and family support. But are these the only reasons? And if that is the case, how come two equally intelligent candidates, putting in the same amount of hard work and having the same level of family support, don’t perform at the same level in any exam? Because there is something known as the paradox of skill at work.

As Michael Mauboussin writes in The Success Equation—Untangling Skill and Luck in Business, Sports and Investing: “As skill improves, performance becomes more consistent, and therefore luck becomes more important… In other words, if everyone gets better at something, luck plays a more important role in determining who wins.”

Mauboussin offers the example of a company. As he writes: “A company can improve its absolute performance, for example but it will remain at a competitive parity if its rivals do the same.” In this situation whether the company does better than its rivals, depends on luck. As Mauboussin writes: “When everyone in business, sports, and investing copies the best practices of others, luck plays a greater role in how well they do.”

How does this apply in the context of exams? Most people prepare for exams these days by going to coaching institutes and if not that, at least using study material provided by coaching institutes. This is typically true more for competitive exams. But it is also true for board as well as BA/BSc/BCom exams in many states.

Given this, a significantly large pool of candidates which has access to the same study material and is also more or less equal on other parameters, faces the paradox of skill. In this situation, who comes out on top or even qualifies in a competitive exam, depends on their luck on the day of the exam.

Let me give you an example from my life. When I first wrote the Common Aptitude Test (CAT) for admission into the IIMs and other MBA colleges, I had prepared decently for the exam. The city that I grew up in did not have a CAT exam centre. So, I had to go to another city to write the exam. I spent a sleepless night in the hotel overnight. And this clearly had an impact on my performance in the exam.

If the examination centre had been in the same city that I grew up in, my performance in the exam would have been significantly better. But this was how the luck of the draw turned out.

The same logic applies to toppers as well. Of course, they need to work hard, but they also need to be lucky on day of the exam. This could mean anything from sleeping well overnight to being able to reach the exam centre on time to not becoming obsessed with a question they are not able to solve.

The media focus on the toppers does injustice to many others who do not come out on top, but are equally intelligent. It’s just that on the day of the exam things didn’t work out as well for them, as they did for the toppers. And there is no second chance.

The column originally appeared on June 28, 2017 in the Bangalore Mirror.



The Bank Ponzi Scheme


Every six months the Reserve Bank of India (RBI) publishes a document titled the Financial Stability Report . In the December 2011 report, it pointed out that at 55 per cent, loans to the power sector constituted a major part of the lending to the infrastructure sector. It further said that restructured loans in the power sector were on their way up.

Restructured loans are essentially loans where the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

This was nearly five and a half years back, and the first time the RBI admitted that there was a problem in the bank lending to the power sector. In the December 2012 report, the RBI said: “There are also early signs of corporate leverage rising among the several industrial groups with large exposure to infrastructure sectors like power.”

When translated into simple English this basically means that many big industrial groups which had taken on loans to finance power projects had borrowed more money than they would be in a position to repay.

In the years to come by, other sectors along with the power sector also became a part of the RBI commentary on loans which were likely not to be repaid in the future. In the June 2013 report, the central bank said: “Within the industrial sector, a few sub-sectors, namely; Iron & Steel, Textile, Infrastructure, Power generation and Telecommunications; have become a cause of concern.”

In the December 2013 report, the RBI said: “There are five sectors, namely, Infrastructure [of which power is a part], Iron & Steel, Textiles, Aviation and Mining which have high level of stressed advances. At system level, these five sectors together contribute around 24 percent of total advances of scheduled commercial banks, and account for around 51 per cent of their total stressed advances.”

Dear Reader, the point I am trying to make here is that the RBI knew about a crisis brewing in the industrial sector as a whole, and power and steel sector in particular, for a while. In fact, in the June 2015 report, the RBI pointed out: “the debt servicing ability of power generation companies [which are a part of the infrastructure sector] in the near term may continue to remain weak given the high leverage and weak cash flows.”

The funny thing is that while the RBI was putting out these warnings, the banks were simply ignoring them and lending more to these sectors. Between July 2014 and July 2015, banks gave out Rs 86,500 crore, or 71.5 per cent, of the Rs. 1,20,900 crore that they had lent to industry to the two most troubled sectors, namely, power and iron and steel.

What was happening here? The banks were giving new loans to the troubled companies who were not in a position to repay their debt. These new loans were being used by companies to pay off their old loans. A perfect Ponzi scheme if ever there was one. If the banks hadn’t given fresh loans, many of the companies in the power and the iron and steel sectors would have defaulted on their loans.

Hence, the banks gave these companies fresh loans in order to ensure that their loans didn’t turn into bad loans, and so, in the process, they managed to kick the can down the road. In the process, the loans outstanding to these companies grew and if they were not in a position to repay their loans 2-3 years back, there is no way they would be in a position to repay their loan now.

Many of these projects, as Raghuram Rajan put it in a November 2014 speech, “were structured up front with too little equity, sometimes borrowed by the promoter from elsewhere. And some promoters find ways to take out the equity as soon as the project gets going, so there really is no cushion when bad times hit.”

The corporates brought in too little of their own money into the project, and banks ended up over lending. Over lending also happened because many promoters in these sectors were basically crony capitalists close to politicians to whom banks couldn’t say no to.

Over and above this, the steel producers had to face falling steel prices as China dumped steel internationally. In case of power producers, plant load factors (actual electricity being produced as a proportion of total capacity) fell. Along with this, the spot prices of electricity also fell. This did not allow these companies to set high tariffs for power, required for them to generate enough money to repay loans.

All these reasons basically led to the Indian banks ending up in a mess, on the loans it gave to power and iron and steel prices.

The RBI has now put 12 stressed loan cases under the Insolvency Bankruptcy Code, in the hope of recovering bad loans from these companies. Not surprisingly, steel companies dominate the list.

The column originally appeared in the Daily News and Analysis on June 23, 2017.


Luck, Skill or Something Else?


This is that time of the year when various examination results get published. And I happen to be in Delhi, where my parents and a bulk of my relatives live. So, I have been listening to a few interesting stories around examination results.

More than the individuals writing the exams, it is interesting to see how their parents react, once the results are out. If a child does well, it is always because of his hard work and the adjustment his or her parents had to make in order to ensure that he or she could totally concentrate on studies.

If a child doesn’t do well, then it is almost always because circumstances beyond their control. Excuses start to spring up. Here are a few that I have heard over the years: He or she wasn’t keeping well through the period of the examination; there was a power cut the night before the Maths exam and he couldn’t do well; the invigilator took away his paper five minutes before the time got over (this seems to be a favourite with parents).

As Robert H. Frank writes in Success and Luck—Good Fortune and the Myth of Meritocracy: “[A] disconnect between evidence and belief is people’s tendency to underestimate good fortune’s role in success, while being too quick to embrace bad luck as an explanation of failure… People want to feel good about themselves, and they’re more likely to enjoy the warm glow of a positive self-image if they think of themselves as highly competent and attribute their failures to events beyond their control.”

But the point is that luck plays a role both ways—in success as well as failure in exams, even though we like to bring only bad luck into the picture. Let me share a few personal examples here even though it has been a long time since I wrote an exam.
When I was doing my MBA, there were two papers, Macroeconomics and Microeconomics, which were deemed to be the toughest of the lot. As luck would have it, I never got around to studying either of the subjects but passed both of them.

How did that happen? Before the Microeconomics exam, a friend took pity and taught me one chapter 30 minutes before the exam. A bulk of the questions came from that chapter. I scored all of them correctly and got more than the required 50 per cent. Hence, luck played a huge role there.

Luck, in the form of bad luck, also played a huge role for many of my friends who had studied everything else but missed out on that particular chapter.

When it came to macroeconomics, due to some organisational hassles, there was a holiday of four days before the exams. And that was enough for me to read large sections of the prescribed text book and pass the exam. Without the holidays, there was no way I could have passed the exam by just studying overnight.

These were two examples from my end. But all of us have such lucky streaks when we write exams over a long period of time from our childhood till our early twenties.
The issue is how should parents approach this. Should they tell their children about the role of luck? Or should they keep harping on the benefits of hard work? Or should they take the middle path, and tell their children that while hard work is important, luck has a huge role to play as well? And if they do this, will the children be able to understand this?

As Frank writes: “Parents who teach their children that luck doesn’t matter may for that every reason be more than likely to raise successful children than parents who tell their children the truth. When the going gets tough, as it inevitably does along almost every career path, someone who’s keenly sensitive to luck’s importance may be more tempted just to sit back and see what happens.” And no parent would want that to happen.

The column was originally published in the Bangalore Mirror/Mumbai Mirror/Pune Mirror on June 21, 2017.

How I Knew Demonetisation Was Going To Be A Disaster Right From Day 2


The recent past has seen even the biggest supporters of prime minister Narendra Modi concede that demonetisation was a disaster that the country could have done without. A major reason for this has been the gross domestic product (GDP) data for the year 2016-2017, which was published on May 31, 2017.

As per this data, the growth for the non-government part of the economy crashed to 5.6 per cent in 2016-2017, after having grown by 8.5 per cent in 2015-2016. In fact, even the 5.6 per cent growth might be an overstatement given that the GDP data does not capture informal sector data well enough. And the informal sector has been in a large mess post demonetisation.

The trouble is that anyone who had any basic understanding of economics or had read up on some economic history, would have known this from day one. And if not from day one, at least from day two.

I wrote my first piece on demonetisation within hours of the announcement to demonetise the Rs 500 and Rs 1,000 notes. As a freelance writer, I am expected to react to things as soon as they happen. The first piece I wrote had a neutral tone to it, where I tried to explain as to why the government had done what it had done.

With the benefit of hindsight, I can say that the first piece was written too quickly and at the same time was highly influenced by the government’s press release explaining the decision. But from Day 2 onwards, I went back to basic economics to essentially say that demonetisation would turn out to be bad for the Indian economy as it eventually has.

After the first piece was published I happened to remember a story that was a part of my first book Easy Money–Evolution of Money from Robinson Crusoe to the First World War.
The story was about cigarettes being used as money in the prisoner-of-war camps that cropped up all over Europe during the Second World War. The prisoners used to receive standard food parcels from the Red Cross during the war. The parcels included biscuits, butter, cigarettes, canned beef, chocolate, jam, milk, sugar, etc.[i]

As soon as the rations arrived, prisoners used to start exchanging them. One of the earliest transactions used to be nonsmokers exchanging their cigarettes for chocolates that the smokers had got. Sikhs, who had been fighting for the British Army, used to exchange their allocation of beef for other goods like butter, jam, and margarine. But gradually cigarettes went way beyond the status of a normal commodity and became the standardized medium of exchange. A prisoner of war even recalls exchanges like “cheese for seven cigarettes” happening in the camps. He also recalls an individual who sold coffee, tea, or hot chocolate at the rate of two cigarettes a cup. This individual eventually scaled up his business but failed, making losses of a few hundred cigarettes.[ii]

Sometimes, the weekly Red Cross parcels which had cigarettes in them, did not arrive. At other times, the stress of heavy air raids near the camps made peo­ple smoke away their money, that is, cigarettes.[iii]

In such situations, there was not enough money (i.e., cigarettes) going around in the prison economy and led to a situation where prices fell. Since people did not have cigarettes to buy goods, those who were hoarding food, toiletries, and so on, had to cut prices in the hope that they are able to make a sale.

This story tells us a lot about how demonetisation has played out.

Money basically has three functions. It is a medium of exchange, a unit of account and a store of value. It’s function as a medium of exchange is its most important function. People use money to buy and sell things i.e. to carry out economic transactions, with the buyer paying money to the seller every time he sells a product or a service.

In the above example cigarettes were used as money. And when a war camp ran out of cigarettes, or there was a shortage, the economy inside the camp collapsed or slowed down considerably.

How is this relevant to demonetisation? Any economy needs a certain amount of money to function properly. Demonetisation at one go rendered 86.4 per cent of the currency useless. While currency is not the only form of money in India, it is the major form.
Like with cigarettes at prisoner-of-war camps, suddenly there wasn’t enough currency going around post demonetisation. Hence, the rupee’s function as a medium of exchange came to a standstill.

The Reserve Bank of India (RBI) has replaced this money at a very gradual pace. In fact, even now the currency in circulation is at 84 per cent of the currency in circulation that prevailed before demonetisation. This shortage of currency over the last seven months has led to a slowdown in the buying and selling of things i.e. people haven’t been able to carry out economic transactions.

The slowdown in economic transactions has ultimately led to a slowdown in economic growth. In fact, when there weren’t enough cigarettes going around, prices collapsed in the prison economy. Along, similar lines prices of agriculture produce, have collapsed since demonetisation, as cash in agriculture trade has dried up. This has led to the farmers protesting across the length and breadth of the country.

Anyone who had studied some economic history would have known from the beginning that demonetisation would turn out to be a disaster that it has. Anyone who understood the functions of money, would have argued along similar lines.

But that is not how it has turned out to be. Economists have gone on and on, about how demonetisation will prove beneficial to the nation, especially in the long run. Some have even built models to show the success of demonetisation.

But the fact of the matter is that you can keep building models to justify demonetisation but that doesn’t change the basic fact that with less money going around an economy contracts or grows at a slower pace.

Because with less money people cannot carry out economic transactions of buying and selling things. And without that economy grows slower or contracts.

Yes people can move onto digital payments. But digital payments haven’t grown fast enough to be able to bring down the influence of cash in the Indian economy. This means people still prefer cash or they are simply not confident about spending money in any form at this point of time.

[i]  C. Desan. Coins Reconsidered: The Political Alchemy of Commodity Money (The Berkeley Electronic Press, 2010).

[ii] R.A. Radford, “The Economic Organisation of a P.O.W. Camp,Economica 12 (1945): 189–201.

[iii]  Desan 2010

The column originally appeared in the Huffington Post on June 17, 2017.

After Farm Loans, Will Govts Waive Off Mudra Loans Next?


A few days back I suggested on Twitter that people with outstanding home loans should organise themselves and ask the government to waive off their loans.

This idea basically came from several state governments waiving off loans given to farmers. It was started by Andhra Pradesh and Telangana, the two states to come out of the erstwhile Andhra Pradesh.

Then it was followed in Uttar Pradesh, where the newly elected government decided to waive off farm loans of around Rs 36,359 crore. It was followed by Maharashtra.

There is a clear trend here. Maharashtra chief minister Devendra Fadnavis recently explained his decision to waive off loans to farm loans by saying:Neighbouring Telangana and Andhra did it first. It created pressure and then UP announced the waiver. The demand had been there but it became very strong after UP’s decision.”

The idea also came from the fact that banks were busy treating large corporates which had defaulted on their loans, with kids gloves, by restructuring their loans and giving them a longer time to repay. This was basically happening because the corporates owed a large amount of money to banks. And any default would hit them hard.

Now as a home loan borrower, try going to a bank and ask for the postponement of payment of EMI to repay the home loan and see how a bank reacts. Obviously, different kind of borrowers get treated differently.

What has helped the cause of the farmers is that they are numerous in number and the fact that they are organised, which helps them carry out protests at a level so that the government registers it. What has helped the corporates is that their average loan amounts are very large and any default would hit the banks hard.

These factors are missing in case of individuals who have taken on home loans. They are not many in number. They are spread across the length and breadth of India. And they are not organised. In 2013, the number of outstanding home loans stood at 46.43 lakh. I couldn’t find a more recent number. Over and above this, there would be home loans given by housing finance companies, as well.

Typically, the outstanding home loans (in value) are around 60:40 (scheduled commercial banks: housing finance companies). Taking the housing finance companies into account, as well as the fact that the total outstanding home loans may have gone up from where they were in 2013, it is safe to say that the total number of outstanding home loans will be still less than 1 crore.

Also, the individuals who have taken on these home loans would be spread across the length and breadth of the country. Hence, it is difficult for them to get together and protest that the government waive off their home loans, like has been the case with farm loans. The same stands for other kinds of retail loans which have smaller average ticket value, in comparison to the home loan, which is usually the largest loan that an individual ever takes on.

Over and above this, the average loan amount owed by them is very small and that ensures that they are likely to face the full legal wrath of the bank, if they default on their home loans, which is not the case with corporates.

Having said that, there is a precedent of a government waiving off home loans as well. In December 2016, the Telangana government had announced a waiver of home loans of around Rs 3,920 crore to individuals who had benefitted from the housing schemes for economically weaker sections of the society over the years.

So, if individuals with home loans, can get themselves organised they might also be able to get a loan waive off.

But there is one particular kind of borrower, who is in a position to organise himself, protest and ask for a loan waive off.

In 2016-2017 and 2015-2016, the total amount of loans extended under the Pradhan Mantri Mudra Yojana (PMMY or better known as Mudra loans) stood at Rs 3,17,977.81 crore. The total number of borrowers over the two-year period stood at around 7.46 crore. A bulk of these loans have been made to women.

Taking cue from farmers, if these borrowers can manage to organise themselves and protest and demand a waive off of their loans, there is a good chance that they might get it. Assuming that only one individual in one household has got a loan under PMMY, we are looking at 7.46 crore households. At five members per household, we are looking at more than 37 crore individuals, on whom these loans have had some impact. And that is a large vote bank.

If these individuals can get themselves organised they are in a very good position to demand and get a waive off on their PMMY loans. Also, the governments have already set a precedent and will find it very difficult to say no.

This will be especially true for states where elections are scheduled before the Lok Sabha election of 2019. On a totally different note, they might not even need to take it up as an issue, some lazy politician might just do the job for them, by promising a waive off.
And that is the problem with these waive offs. They are unlikely to stop in a hurry.

The column originally appeared on June 19, 2017, on Equitymaster.


Narendra Modi and the Oil Lottery


Three weeks ago, the Narendra Modi government completed three years in office. On the occasion, the media went to town discussing the performance of the government. The general opinion among analysts, television anchors and economists, who have a thing or two to say on such matters, was that the government had done well on the economic front, given that that the Indian economy grew by 7.5 per cent per year over the last three years. In coming to this conclusion, these individuals did not take one thing into account: the falling price of crude oil.

When Narendra Modi was sworn in as prime minister in late May 2014, the price of the Indian basket of crude oil was a little over $108 per barrel. As of June 8, 2017, a little over three years later, the price of the Indian basket of crude oil stood at $48 per barrel, around 56 per cent lower.

Lest I be accused of making only a point to point to comparison, take a look at the following figure.

Source: Petroleum Planning and Analysis Cell.

In May 2014, the average daily price of the Indian basket of crude oil was $106.85 per barrel. It rose in June 2014 to $109.05 per barrel. And then the price of oil started to fall. Since June 2014, the overall trend in oil prices, has been on its way down (as can be seen by the red arrow). Even though prices have gone up in the recent past, they are well below where they were between mid-2011 and mid-2014.

This can be best described as the luck of Narendra Modi. At least on the economic front, lower oil prices have made the Modi government look good.

I first made this point in the weekly Letter that I write. The foremost impact of lower oil prices has been on the rate of economic growth. Let’s try and create a counterfactual situation here by trying to figure out how economic growth would have turned out to be if the oil prices in the last three years, were as high as they were during the time when Manmohan Singh was the prime minister.

At its most basic level, the gross domestic product (GDP) is expressed as Y = C + I + G + NX, where:

C = Private Consumption Expenditure
I = Investment
G = Government Expenditure
NX = Exports minus imports

India imports around four-fifths of the oil that it consumes. To be very precise, in 2016-2017, the actual import dependency or the proportion of crude oil consumed that is imported stood at 82.1 per cent.

Given this, net exports (or NX) in the GDP tends to be a negative number. Higher oil prices essentially ensure that oil imports go up. Oil imports going up leads to the net exports number becoming a larger negative entry. In the process, the GDP number comes down and the GDP growth comes down as well.

The reverse is also true. Hence, when oil prices come down, the NX number comes down, the GDP goes up, and in the process the GDP growth goes up as well. This is precisely what has happened over the last three years.

As per the latest GDP numbers declared on May 31, 2017, the economic growth during the last three years stood at 7.5 per cent per year. This was primarily because the average price of Indian crude oil between April 2014 and March 2017, stood at $59.3 per barrel. In comparison, the average price of crude oil between April 2011 and March 2014 had been $108.5 per barrel.

Now, let’s assume that the average net exports figures were at the same level during the Narendra Modi years as they had been when Manmohan Singh was the prime minister between 2011-2012 and 2013-2014. We are basically trying to figure out as to what would have happened if the price of oil had continued to be at a high level even after 2014.

What impact would have this had on the economic growth? The economic growth during the three-year period that Modi has governed would have been 6.5 per cent per year, and not the 7.5 per cent that it has come to. This is nearly 100 basis points lower.

Let’s compare this to the economic growth during the last two years of Manmohan Singh’s government. (I am using the last two years because in case of the new GDP series launched in January 2015, data starts only from 2011-2012.) The economic growth stood at 5.9 per cent.

While this is lower than the three-year economic growth during Modi’s era, it is not as low as it initially seemed. And that is primarily because of lower oil prices during Modi’s time as the prime minister.

So, lower oil prices have bumped up the economic growth figure. They have also benefited the government in another way. The benefit of lower oil prices hasn’t been passed on to consumers in the form of lower petrol and diesel prices.

As mentioned earlier, between May 2014 and now, the price of the Indian basket of crude oil has fallen by 56 per cent. During the same period, the petrol price in Mumbai has fallen by a mere 1.9 per cent. In case of diesel, the price has fallen by only 3.6 per cent.

Hence, the central government and the state governments have totally managed to capture the fall in oil prices. If we look at the central government, the net excise duty collections of the central government stood at around Rs 1,76,535 crore in 2013-2014. This has jumped by more than 100 per cent to Rs 3,87,369 crore by 2016-2017, primarily because the government chose to capture a bulk of the fall in price of oil by increasing excise duty on petrol as well as diesel.

This helped the government to keep increasing its expenditure without having to bother about a large fiscal deficit.

It is interesting to speculate what would have happened if the government had passed on the fall in the price of crude oil to consumers in the form of lower petrol as well as diesel prices. Consumers would have had more money to spend. And robust consumer spending is always a better way to create economic growth than a terribly leaky government spending.

To conclude, while the Modi government has done better in the last three years than the Manmohan Singh government did in its last two years, the fall in the price of crude oil has been a major reason behind it. Modi has been terribly lucky, and it’s time that analysts and economists acknowledged this reality.

The interesting thing here is that people have a hard time distinguishing between luck and skill. As Michael Mauboussin writes in The Success Equation: “Our minds have an amazing ability to create a narrative that explains the world around us, an ability that works particularly well when we already know the answer.” In Modi’s case, this has meant attributing India’s good official economic growth rate to his skill rather than to the fact that he got lucky.

The column originally appeared on on June 14, 2017.