Over the last one year, as retail prices of petrol, diesel and other petroleum products have surged, the government has attracted criticism.
Finance Minister has sought to counter such criticism by claiming that the current government cannot bring down taxes (and, as a consequence, prices) because it has to pay for the oil bonds issued by the previous regime.
What are oil bonds?
- An oil bond is an IOU (I owe you), or a promissory note issued by the government to the OMCs, in lieu of cash that the government would have given them so that these companies don’t charge the public the full price of fuel.
- An oil bond says the government will pay the oil marketing company the sum of, say, Rs 1,000 crore in 10 years.
- And to compensate the OMC for not having this money straightaway, the government will pay it, say, 8% (or Rs 80 crore) each year until the bond matures.
- Thus, by issuing such oil bonds, the government of the day is able to protect/ subsidise the consumers without either ruining the profitability of the OMC or running a huge budget deficit itself.
Why were they issued?
- When fuel prices were too high for domestic consumers, governments in the past often asked oil marketing companies (OMCs) to avoid charging consumers the full price.
- But if oil companies don’t get paid, they would become unprofitable.
- To address this, the government said it would pay the difference.
- But again, if the government paid that amount in cash, it would have been pointless, because then the government would have had to tax the same people to collect the money to pay the OMCs.
- This is where oil bonds come in.
How much of fuel prices is tax?
- There are two components to the domestic retail price — the price of crude oil itself, and the taxes levied on this basic price.
- Together they make up the retail price.
- The taxes vary from one product to another. For instance, as of now, taxes account for 50% of the total retail price for a litre of petrol, and 44% for a litre of diesel.
How much of the UPA-era oil bonds has the NDA government paid back?
- There are two components of oil bonds that need to be paid off: the annual interest payment, and the final payment at the end of the bond’s tenure.
- By issuing such bonds, a government can defer the full payment by 5 or 10 or 20 years, and in the interim just pay the interest costs.
- Table 1 shows that between 2015 and 2021, the NDA government has fully paid off four sets of oil bonds — a total of Rs 13,500 crore.
- Each year, the BJP government had also had to pay the interest rate on all bonds that have not matured. Chart 1 shows the amount paid towards interest payment each year.
- Between 2014 and 2022, the government has had to spend a total of Rs 93,686 crore towards interest as well as the principal.
Still, isn’t it a bad idea to issue such bonds?
- Former PM Manmohan Singh was correct in noting that issuing bonds just pushed the liability to a future generation.
- But to a great extent, most of the government’s borrowing is in the form of bonds.
- This is why each year the fiscal deficit (which is essentially the level of government’s borrowing from the market) is so keenly tracked.
- Further, in a relatively country like India, all governments are forced to resort to the use of bonds of some kind.
- Take the current NDA government itself, which has issued bonds worth Rs 2.79 lakh crore (twice the amount of oil bonds) to recapitalise public sector banks.
- These bonds will be paid by governments till 2036.
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