What are Oil Bonds? Why UPA era oil bonds are in News? [Explained]

Brajesh Mohan
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What are Oil Bonds? Why UPA era oil bonds are in News? [Explained]

Why In News?

Finance Minister Nirmala Sitharaman said Monday: “The Government of Prime Minister Narendra Modi is today paying for the oil price reduction done by the UPA in 2012-13"

“Look at their trickery,” she said, noting that the previous government had cut taxes on fuels but left the current government with oil bonds. “We don’t do so many tricks like the UPA government. They issued oil bonds for which the principal amount is over Rs 1 lakh crore, and for the last seven fiscals, the government has been paying over Rs 9,000 crore interest annually… If I did not have the burden to service the oil bonds, I would have been in a position to reduce excise duty on fuel,” she said.

RBI’s Monetary Policy Committee in its latest resolution urged central and state governments to reduce taxes on petrol and diesel. “With crude oil prices at elevated levels, a calibrated reduction of the indirect tax component of pump prices by the Centre and states can help to substantially lessen cost pressures”, the MPC resolution said.


Background About Oil Bonds

The annual average price of India’s crude oil basket (COB) increased from $55.72 per barrel in 2005-06 to $ 62.46 (2006-07), $ 79.25 (2007-08) and 83.57 (2008-09) before falling to $69.76 in 2009-10.

  • In three out of these five years, the COB price was higher than what it is currently ($68.92 per barrel according to data from petroleum ministry on 17 August,2021). 
  • However, retail prices of petrol and diesel were much lower than what they are today
  • The maximum price per litre of petrol and diesel in Delhi in 2005-06 was ₹43.49 and ₹30.45 respectively. This changed to 47.43 for petrol and 35.47 for diesel in the year 2009-10.

What are the Oil Bonds

Oil bonds are special debt instruments that were issued by the UPA government to oil marketing companies (OMCs) in place of a cash subsidy between 2005 and 2010.

  • Since the oil companies were not free to fix their own price for petrol (before 2010) and diesel (before 2014), they were at times selling fuel below the international market price.
  • To compensate for this loss, the companies received cash subsidies from the government.
  • In view of rising international crude prices between 2005 and 2010, the UPA government issued total oil bonds worth around 1.34 lakh crores in order to subsidies retail fuel prices.
  • Instead of paying direct subsidy to oil marketing companies from the Budget, the then government issued oil bonds totaling Rs 1.34 lakh crore to the state-fuel retailers in a bid to contain the fiscal deficit.
  • This was done to partially compensate OMCs for recoveries amounting to Rs 2.9 lakh crore. Under-recoveries are the difference between the cost of purchasing crude oil in the international market and the price at which petroleum products are sold in the domestic market.
  • In the aftermath of the recession, OMCs were facing large under-recoveries. This presented the government with the dilemma of ensuring the financial stability of state-owned OMCS, while taking into account political repercussions of allowing fuel prices to rise. Oil bonds were chosen as the vehicle to dampen the pressure on OMCs while keeping prices in check.

  • Citing the need to repay interest and principal components on these bonds, the Centre has now argued that it needs higher excise duty to help its finances.

What is the current fiscal burden of oil bonds?

As admitted by the finance minister, the central government has to pay around ₹1.7 lakh crore for these accumulated liabilities. 

  • However, the 2021-22 union budget shows that the government does not intend to pay all of them in the current fiscal year. 
  • Budgetary allocation for oil bonds in the current fiscal year is just ₹9989.96 crore in interest payments. 
  • This is only a fraction of the windfall gain to the union government from the additional petroleum taxes. 

Union excise duties, which comprise the bulk of petroleum taxes increased from ₹2,39,452 crores in 2019-20 to ₹3,89,677 crores in 2020-21 (provisional numbers) and are expected to be ₹3,35,000 crores in 2021-22, as per Budget Estimates.

Why were oil prices deregulated, and how has it impacted consumers?

Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of aviation turbine fuel in 2002, petrol in 2010, and diesel in 2014.

  • Prior to that, the government would intervene in fixing the price at which retailers were to sell diesel or petrol. 
  • This led to under-recoveries for oil marketing companies, which the government had to compensate for. 

The prices were deregulated to make them market-linked, unburden the government from subsidizing prices, and allow consumers to benefit from lower rates when global crude oil prices tumble.

  • While oil price deregulation was meant to be linked to global crude prices, Indian consumers have not benefited from a fall in global prices as the central as well as state governments impose fresh taxes and levies to raise extra revenues. This forces the consumer to either pay what she’s already paying, or even more.

Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices based on calculations of their own cost and profits. However, the key beneficiary in this policy reform of price decontrol is the government.

Is Only Central Govt Charges Taxes?

State and central levies account for about 55.4% of the retail price of petrol and 50% of the price of diesel in Delhi.

  • Central levies alone account for about 32.3% of the retail price of petrol and 35.4% of the pump price of diesel in Delhi. 
  • The Centre hiked the excise duty on petrol by 65% to Rs32.98 per liter and diesel by 101% to Rs31.83 per liter between March 2020 and May 2020 in view of falling crude oil prices.

To what extent have the oil bonds been serviced by the government?

The interest on oil bonds paid in the last seven years totaled Rs 70,195.72 crore. Of the Rs 1.34 lakh crore worth of oil bonds, only Rs 3,500 crore principal has been paid and the remaining Rs 1.3 lakh crore is due for repayment between this fiscal and 2025-26.

  • The government has to repay Rs 10,000 crore in the current fiscal year, another Rs 31,150 crore in 2023-24, Rs 52,860 crore in 2024-25, and Rs 36,913 crore in 2025-26. But this is less than a tenth of the excise duty on petroleum products at Rs 3.45 lakh crore, a majority of which accrues to the Centre.

Impact of Rupee Depreciation on Oil Price

Depreciation refers to a fall in the value of the domestic currency which is caused by the demand for foreign currency exceeding its supply in the market. In such a situation one has to pay more than before to get units of foreign currency

  • Rupee depreciation usually results in rising fuel prices as India depends on imports for crude oil and a drop in rupee value makes imports expensive.
  • A continued slump in the value of the rupee means fuel prices are likely to go up, making your commute and everyday activities expensive
  • To be sure, the rupee price of COB has been increasing because of the depreciation of the rupee, which was 44.27 per dollar(average) in 2005-06, fell to 47.44 per dollar in 2009-10 and is at 74.28 per dollar at the moment (as on 17 August).

Did Only UPA Govt released such Bonds?

  • No, The NDA government too has used a similar strategy to inject capital into state-owned banks and other institutions by issuing recapitalization bonds worth Rs 3.1 lakh crore, which will come up for redemption between 2028 and 2035.
  • The government so far has issued recapitalization bonds to public sector banks and EXIM Bank, IDBI Bank and IIFCL worth Rs 3.1 lakh crore, as per Budget documents.

Conclusion:

The reason for High Fuel Price is not only the UPA Era's Oil Bond but the gradual increase in taxes by the Government when the International Crude Price is low and Not decreasing the Taxes when it soars again.

Another reason can Rupee Depreciation, Rupee depreciation usually results in rising fuel prices as India depends on imports for crude oil, with high Import cost Oil Marketing Companies have to Pay higher amount to buy same Crude Oil which make it expensive in Domestic Market after Inclusion of Transportation, Refineries, Profit of OMCs, Central and State Govt Taxes.


Reference Article : IE, HT

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