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Ishaan Nag – My diary of the human society.

Tag: news

  • The fallacy of accounting and opportunity cost: Why air cargo’s popularity just does not quit despite spiking jet fuel costs.

    Ishaan

    The world commodities market, especially for crude oil, is volatile at historically high levels at the time of writing this blogpost, with crude oil averaging USD 103.9/barrel following speculative inflationary pressures on price due to the closure of the Strait of Hormuz in March 2026. Jet fuel prices rose to USD 124.7/barrel in Q1 2026, which represents a 36% YoY increase. Despite these skyrocketing prices,  global air cargo freight demand remains robust. This is despite the fact that this means of transport is notoriously cost ineffective at first glance, estimated to cost 4-5 times more than road transport, and 12-16 times that of maritime freight. 

    Air cargo is usually characterized by high value goods, usually exceeding USD 4/kg while freight rates themselves are USD 1.5-4.5/kg. These are perishable, time sensitive goods such as medicines, consumer goods, food, inputs which need to meet deadlines for manufactured products or even documents, apart from emergency shipments. Despite the niche, necessary nature of the cargo leading to lower elasticity of demand, standard economic theory would predict demand to fall at a certain, albeit low rate. Yet according to the IATA, the volume of international cargo actually increased 3.7% YoY, despite these upward pressures in price. Are firms making a terribly irrational decision, or are we sinking into fallacies? An important consideration to keep in mind is the distinction between the actual accounting cost of air freight, reflected by the price increase we see, and the economic opportunity cost of transporting these goods by other means, which has also increased, arguably disproportionately. 

    The proverb “time is money” is most prominent in this case. The incredible amount of time saved by transporting a modest amount of time sensitive, perishable cargo through a metal tube nearing the speed of time is quantitatively more than the per unit cost saved by transporting mammoth amounts of those goods bound by a deadline through a mega ship taking several delays and complex port logistics and risking delays. This is what the true price of time demonstrates: avoiding an unavoidable time tariff no amount of corporate lobbying can successfully avoid. For firms, air cargo provides a means of hedging against overreliance on maritime, which too has been  recently marred by a series of global conflicts causing bottlenecks in the supply chain, such as the Houthi strikes and increased danger of transporting through the red sea, the strait of Hormuz blockade, and the Suez Canal blocking, with incredibly high insurance premiums for maritime transport following. Planes need not worry about more than blocked airspaces in which rerouting is far simpler. Customs, clearing and other administrative processes are faster with air freight, further reducing the aforementioned true price of time further.

    Air transport may also serve to provide a good logistic fit; say a manager in Zara finds out new kinds of fashion which trend and have high demand, but that in itself is very temporary, and any delays in introducing or replenishing that line of fashion would entirely render a very valuable line almost fully worthless. The premium charged by air freight is merely worth it. 

    Moreover, as fuel consumption is mostly proportional to the aircraft weight and distance flown, the variable or marginal cost is thus based on weight and destination. Thus, for shorter distances air freight rates per unit distance are higher, as larger proportions of the trip are spent on ground (internodal transport through roads). Marginal cost thus diminishes as the value of goods and distance increases. 

    Macroeconomic studies, particularly one focusing on US imports provide a good case for fast, expensive air transport. They find that long transit delays lower the probability that a country will successfully export goods. One can thus think of the air freight premium as an investment for customer retention. Moreover, it is estimated that each day in transit is worth between 0.6%-2.2% of the goods’ value. Thus, each day of transit delay leads to a true price time based tax 0.6%-2.2% of the goods’ value. This represents depreciated, dead capital which has already been paid for in costs of production yet cannot generate 100% of the estimated revenue. Depending on the delay caused by maritime transport over air freight, depreciation cost often exceed costs saved by choosing a cheaper, more uncertain mode of transport. This is when opportunity cost of choosing road or maritime transport exceeds the accounting cost of air freight. 

    Macroeconomic studies on transport logistics, specifically Hummels and Schaur isolate air transport costs to model trade with distant trade partners. Here the total trade with neighbouring partners is separated between air and maritime transport.

    For making a quantitatively sound conclusion, we infer that:

    total cost of shipping via any mode = direct freight cost + time depreciation cost + Inventory holding cost

    To make the decision to choose air over maritime transport, we need:

    TTC(maritime) > TTC(air)

    (TTC- Total Transport Cost)

    We know, that from the total cost of shipping, the first component is much higher in air, while the second and third components are higher in maritime. This implies:

    direct freight cost + time depreciation cost + Inventory holding cost(maritime) > direct freight cost + time depreciation cost + Inventory holding cost(air)

    Expanding this inequality, we see that air transport become more feasible when the loss in keeping a unit of the specific good in transit is higher than the extra freight cost per day saved by choosing a cheaper alternative, say maritime.

    Hummel and Schaur find that:

    Extra freight cost per day saved = (c(air)-c(maritime))/(t(maritime) – t (air))

    Where: 

    c=cost

    t=days

    As distance increases, numerator increases but denominator decreases at a greater rate. Increasing cost per day saved by choosing air transport.

    So long as maritime transport remains more volatile than air transport, and trade takes place between partners located far enough apart, it holds rational to pay the premium price and accounting cost of using air transport to save far greater on the opportunity cost of using maritime transport. 

    Bibliography

    Hummels, D. L., & Schaur, G. (2002). Time as a trade barrier. GTAP Working Paper Series, 103(7), 2935–2959. https://doi.org/10.1257/aer.103.7.2935

    Quarterly Air Transport Chartbook Q1 2026. (n.d.). https://www.iata.org/en/publications/economics/reports/quarterly-air-transport-chartbook-q1-2026/

    Aviation Value Chain Brief. (n.d.-b). https://www.iata.org/en/publications/economics/reports/aviation-value-chain-brief-15-february-2024/

    Review of Maritime Transport 2025: Staying the course in turbulent waters |. (2025, September 24). UN Trade and Development (UNCTAD). https://unctad.org/publication/review-maritime-transport-2025

    World Bank Group. (2023). Air Freight: A Market Study with Implications for Landlocked Countries. In World Bank. https://www.worldbank.org/en/topic/transport/publication/air-freight-study

    Golub, S. S. . ., & Tomasik, B. (2008). Measures of international transport cost for OECD countries. OECD Economics Department Working Papers. https://doi.org/10.1787/241707325051

  • MONETARIZATION OF POLITICS-ELECTORAL BONDS ARE DONE AND DUSTED, AND HOPEFULLY THE LAST OF ITS KIND

    Ishaan

    On February 2024, the Indian Supreme Court ruled that political parties could no longer receive political funding from electoral bonds, striking it down as unconstitutional, a measure touted as a mostly clean and accountable method to receive political funding by the ruling BJP, which introduced the scheme back in 2018. Fast forward to the 2019 general elections and the present, and we have seen that the Election Commission of India (ECI) itself raised doubt about its transparency in its affidavit claiming that “the scheme is contrary to the goal of transparency in political finance”, also sharing a letter to the Union Government outlining its impact on the transparency of political funding. Several parties have moved the SC against the electoral bond scheme, prominent among which is the pro-democracy NGO Association of Democratic Reforms (ADR), and this eventually resulted in the effective termination of the scheme, much to the rejoice of the opposition parties and pro-democracy organizations and institutions, which begs a few questions: what is the electoral bond scheme which justifies its controversy? Why is its result of further opacity contradicting its supposed intention of higher transparency? Why is the opposition rejoicing? And finally, is there a better option? Were previous methods any better?

    Electoral bonds are instruments wherein the bearer (political parties) is paid a certain amount on demand by the payer, who are according to this scheme, any Indian citizen and domestic or foreign organization. It was introduced in The Finance Bill of 2017 during the Union Budget as the Anonymous Electoral Bond scheme.  Its rationale was that the veil of anonymity regarding from who or what political parties sourced their funding made them less susceptible to be swayed by their interests, hence increasing accountability. It was facilitated by amending legislation to allow foreign funding of parties by finance act 2016. Moreover, amendments to the  Income Tax Act ensured it wasn’t  required for political parties from keeping a detailed record of funding received from the scheme. The cap on maximum donations made by companies to political parties was removed. Previously “companies could only donate up to 7.5 percent of three years of the company’s net profits”.

    The government also argued that since funding was done through the formal banking system, as the SBI was the sole authority in raising these bonds, there was less chance for foul play. This, however, was also flawed, as the SBI being directly under the control of the government, gave the ruling party a further advantage in the acquisition and concealing of information pertaining to the electoral bonds. Thus, any plan to devise a fair method of political funding was flawed at best and ostensible at worst. The striking down of the electoral bond system was hailed by Indian political institution such as the ECI, NGOs such as the ADR, and even opposition political parties such as the Left Democratic Front (which, in fact, was one of the parties which moved the SC against the scheme) and the INC, which in fact promised in its manifesto for the 2019 general elections to remove the scheme if voted. So why the opposition from the opposition?

    Firstly, there are concerns about the growth of a political oligarchy similar to Russia, if you will. The first cycle of electoral bonds showed that 85% of the bonds were purchased in the denomination of Rs 1 crore. This trend continued throughout the existence of the Scheme. Till January 2024, 15,631 electoral bonds worth Rs 15,631 cr were purchased in this denomination, which is more than 94% of the total bonds sold during all the phases. The large denominations of the purchase indicated that it was the conglomerates which bought most of the electoral bonds, which could have resulted in higher influence of corporates, thus giving political priority to corporations over the individual citizens and their interest. So, electoral bonds have been shown to erode the Right To Information Act and the principle of transparency  which is so crucial and intrinsic to the functioning of a legitimate democracy, hurting the so-called Social Contract between the individual and the state. It also ran the risk of promoting an oligarchy in the political system, and some may argue has somewhat succeeded, though not necessarily due to the electoral bond scheme, with the growing public discourse on the seemingly symbiotic relationship between the Adani corporation and the current administration. However, Indian politics has historically always been swayed by powerful individuals and organizations influencing the government to act in their interest, even in previous governments of the current opposition. But I digress.

    The LDF and the INC have also both shown  their disapproval of the scheme, and it is understandable why. The Electoral Bond scheme seems to have denied the opposition parties a level playing field in the area of political funding. BJP’s received 74 percent of bond yields among national parties,  while among both national and state parties both, the share was 57%. Electoral Bonds thus decreased the level playing field between political parties.

    Given these disadvantages, it seems any other form of funding is better, even the previous methods, though they are not without their limitations. Let us take the example of electoral trusts, which ensure funding solely through the banking system, and “disclose the details of political contributions to beneficiary parties through the regular filing of annual reports and the link between the political party and the donor can be traced by the Election Commission”, although the information is not revealed to the public. One of the main arguments for the Bond scheme which argues that funding through the banking system would result only in white money funding is hence redundant, for the system was already in place and Electoral Bonds were, in this regard, nothing novel.

    However, even through this system, Indian politics were still susceptible to unwanted influence. In March 2014, the Delhi High Court had held both the Congress and the BJP guilty of taking foreign funding from Vedanta and its subsidiaries. The then INC government and the opposition of BJP in a shameless example of collusion, amended legislation such that the illegalities resulting from their respective sources of political funding were removed.

    I argue not that the previous system was good, but that it was better. Structural flaws in the form of foreign funding and opacity persist with both the methods of funding, but as explored, legislation gave these unfair practices legitimacy in the case of Electoral Bonds. Our take home as perceptive citizens may be the lesson that legislation does not equal legitimacy. In some cases, legislation makes us worse off for its much harder to overturn a bad practice, in the case of the electoral trusts and its misgivings, the amendments to the Foreign Contribution Regulation Act which removed the illegalities of political funding resulted in both the BJP and Congress escaping scot free from the verdict of the Delhi High Court. The bench of justices led by Chief Justice DY Chandrachud of the Supreme Court appropriately took the verdict of striking down the Electoral Bond scheme, but it was, in fact, operational for 6 odd years from 2018 to 2024 February. It was a lucky situation that good sense prevailed, but good sense can’t be relied on indefinitely. At some point, institutional and structural changes are the only way out. This is especially true in the case of aforementioned monetarization of politics.