Diesel crack spread, US trade deficit, inflation in Iran, freebie economics | Bidishanomics Ep 28

Episode Summary

The episode examines how geopolitical disruptions, trade policy, public spending, and inflation affect business costs and household welfare. Its most direct business implications concern fuel-dependent transport, supply-chain resilience, trade exposure, and the design of public spending.

Diesel, Refining, and Supply-Chain Costs

• Crack spread is the difference between the price refiners receive for diesel and the cost of the crude oil used to produce it. The discussion says the US spread reached about $100 per barrel in August, then eased to roughly $80, while Brent crude was around $100 per barrel.
• The guest expects the spread to move in jumps rather than rise steadily, as refinery outages, conflict, and shipping-route disruptions change supply. Damage to Russian refineries has constrained its diesel refining and exports; the export shortfall was described as extending from July to October.
• Shipping through the Strait of Hormuz was said to carry additional insurance costs of 7.5–10% of a ship’s value per trip, up from 2–3%. Rerouting around the Cape of Good Hope can add 10–15 days, and alternative routes also face disruption and uncertainty.
• Business and policy playbook discussed:
  • Build flexibility into routing and inventory plans; disruption risk may be difficult to price reliably.
  • Consider economies of scale in shipping. During past Suez Canal disruption, larger ships helped offset the cost of longer routes by carrying more cargo.
  • In the short term, link freight charges to diesel prices and target assistance at small truckers rather than offering broad tax cuts.
  • Over the longer term, shift some freight to rail and coastal shipping, and develop charging infrastructure before relying more heavily on electric trucks and buses. EV supply-chain imports remain a constraint.
• The impact is particularly relevant to India: the discussion cites 81 of every 100 trucks and buses sold as diesel-powered, compared with 4 electric vehicles. Diesel accounts for half or more of truckers’ running costs, and about 71% of goods move by road. Transporters were seeking a 0.65% freight increase for every rupee rise in diesel.
• The guest warns that higher diesel costs can pass through to food prices because trucks move much of the produce. The conversation also notes that India’s core inflation had risen from 3.9% to 4.2% and raises the possibility of a further repo-rate increase at the next MPC meeting.

US Trade Deficit and the Dollar

• US tariffs have not necessarily reduced the overall trade gap; according to the discussion, trade flows have partly shifted between supplier countries. China was described as the US’s fourth-largest source of trade deficit, behind Mexico, Vietnam, and Taiwan.
• Businesses reportedly brought forward purchases after tariffs were announced, building inventories ahead of possible cost increases. This front-loading temporarily widened the trade gap; despite this, the gap over the first eight months was said to remain below the prior year’s level.
• The episode frames the issue as a version of the Triffin dilemma: global demand for dollars supports the dollar’s international role, but a strong dollar makes US exports less competitive. Reducing imports through tariffs does not, by itself, resolve that underlying tension.
• Metrics cited: The US current-account deficit was $246 billion in April–June, or 3%, up from 2.7% in the preceding comparison period. The monthly trade gap rose to about $106 billion from $93 billion in July. The guest also cites dollar strength of 55% in 1985 and US interest costs of about $2.8 billion a day.
• The proposed route out of the imbalance is higher national saving, though the guest questions how achievable that is given US borrowing and debt levels. The broader lesson for businesses is that tariffs and exchange-rate changes can redirect sourcing without necessarily reducing a country’s aggregate external imbalance.

Evaluating “Freebies” and Public Spending

• The guest cautions against assigning schemes a simple positive or negative score without examining their purpose, fiscal cost, and delivery. Cash transfers can support consumption, but the review discussed did not find reliable improvements in child nutrition, schooling, or lifting families out of poverty.
• Four-question assessment framework attributed to Richard Musgrave:
  1. Does the scheme meet a real need?
  2. Does it leave something lasting?
  3. Can the state fund it without borrowing for day-to-day costs?
  4. Is it allocated under clear rules, rather than mainly because an election is near?
• The episode cites ₹1.7 lakh crore in cash payments to women in India for the year discussed, and says the number of states visibly running such schemes rose from two in 2022 to 12.
• A Tamil Nadu example contrasts a gold ring worth about ₹17,000 for each child born in a government hospital—an estimated total cost of ₹756 crore—with a cited ₹350 crore requirement to hire doctors for emergency delivery centres. The point is to assess both the scheme’s intent and the opportunity cost of alternative spending.
• The guest also notes that a US set of payment announcements—described as a one-time $90 payment to more than 20 million older Americans, a $500 rebate for about one million people, and a $5,000-per-adult promise—could imply very large fiscal costs if implemented as stated.
• Operational takeaway: Assess public programmes by need, lasting benefit, affordability, and transparent eligibility; also examine whether people can actually access the benefit. The discussion uses complicated benefit systems as an example of how poor design can undermine a programme’s intended value.

Inflation and Household Resilience in Iran

• The episode describes households coping with high inflation by cutting or changing what they eat and prioritising basic necessities.
• Two Iranian data sources differed: annual inflation was reported at 83.8% by the Central Bank of Iran and 89.8% by the Statistical Center of Iran. Food inflation was reported at 121% in September, after reaching 128% in July.
• Reported year-on-year price rises included cooking oil and fats, 261%; dairy, 147%; meat, 145%; and bread and grain, 117%. The discussion also cites increases of 642% for insulin and 95% for baby formula.
• The minimum wage was raised 60% in March to 166 million rials a month, but the guest says it remained below Tehran’s poverty line.
• The business and economic mechanism described is a self-reinforcing inflation loop: currency weakness and expectations of further price increases encourage people to spend money quickly, while sellers become less willing to sell on credit when they cannot predict replacement costs. This can put further upward pressure on prices, even as jobs and purchasing power weaken.

When Lower Duties Count as a Subsidy

• A targeted import-duty reduction—for example, from 10% to 5% for a particular sector or business—is treated as a subsidy in the discussion. The foregone tax revenue is described in budget terms as “revenue foregone.”
• The guest distinguishes targeted relief from a tax reduction that applies across the economy, such as a general GST rate cut. The former may confer a selective advantage and, as discussed, can fall within the WTO subsidies framework.

Books and Film Mentioned

• The Box — Mark Levinson, on how transport costs and containerisation shape the world economy.
• Exorbitant Privilege — on the dollar’s international role and its effects on other economies.
• I, Daniel Blake — a film used to illustrate the difficulty of navigating benefits systems.
• Persepolis — Marjane Satrapi’s graphic memoir about growing up amid war.

Presenters and Sources Mentioned

Presenters: Apoorva Mandhani and Dr. Bidisha Bhattacharya.

Sources and figures referenced in the discussion: The Economic Survey of India; PRS Legislative Research; the Statistical Center of Iran; the Central Bank of Iran; Al Jazeera reporting; WTO Subsidies Agreement, Article 2.2; and ThePrint analyses on defence spending and state capital and revenue expenditure. The discussion also refers to Alfred Marshall, Robert Triffin, Richard Musgrave, and Philip Cagan.