OIL BONDS

WHAT ARE OIL BONDS?

Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy. These bonds are typically of a long-term tenure like 15-20 years and oil companies are paid interest. Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy.

These bonds are typically of a long-term tenure like 15-20 years and oil companies are paid interest.

Before the complete deregulation of petrol and diesel prices, oil marketing companies were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price.

ISSUANCE OF SUCH BONDS?

Compensation to companies through issuance of such bonds is typically used when the government is trying to delay the fiscal burden of such a payout to future years.

Governments resort to such instruments when they are in danger of breaching the fiscal deficit target due to unforeseen circumstances that lead to a collapse in revenues or a surge in expenditure.

These types of bonds are considered to be ‘below the line’ expenditure in the Union budget and do not have a bearing on that year’s fiscal deficit, but they do increase the government’s overall debt. However, interest payments and repayment of these bonds become a part of the fiscal deficit calculations in future years.

GOVERNMENT; UPA & NDA

Back in 2005, the UPA government had a massive problem on its hands. They were trying to fix the price of oil in a bid to make fuel more accessible to the general public.

Prices can’t be fixed. They can only be discovered when buyers and sellers meet and bargain in an open forum. The only other way to fix a price is to subsidize it by taking on the burden yourself. So, the government did just that. They subsidized the price of oil by setting aside a portion of their budget. And to their credit, they continued to do this until they realized they could do this no more.

Having two choices,

  1. They could have stopped fiddling with the prices and let demand and supply take their own course.
  2. Or they could have adopted another crude solution — Oil Bonds

The idea is simple. We have these Oil Marketing companies (Hindustan Petroleum, Bharat Petroleum etc.) that do most of the selling and in the early days, the government would simply ask them to sell oil at a discounted price and promise to make up for the shortfall by paying them upfront.

[1]However, with oil bonds, this equation is a bit different. Instead of paying cash up front, the government made a promise to settle the dues sometime in the future (in 15–20 years). This obviously alleviated the burden off of the government’s finances. But it shifted the burden elsewhere — on the oil marketing companies (OMCs).

And wondering why they obliged, because they are government-controlled entities. To be precise, they didn’t have much of a say here and between 2005 and 2010 the government issued oil bonds to the tune of 1.4 lakh crores.

Bearing in mind, the government was prompt with the interest payments, but the OMCs were only expected to see the principal after 2021. While this may seem like a terrible deal for the oil marketing companies, there is a small caveat here. The companies holding these bonds didn’t have to hold on to them until 2021. They could have sold them elsewhere if they wanted immediate relief. After all, the principal was bound to be paid and the government would never have defaulted on its obligations. Therefore, the bonds held a lot of value.

As per one of the reports by the Hindu Business Line, it seems Hindustan Petroleum and Bharat Petroleum did just that. They seem to have already sold large chunks of oil bonds in the open market and traded them for cash. The only other company still holding on to every last oil bond — Indian Oil Corporation

Members of the current NDA government have repeatedly asserted that these bonds seem to be overbearing in nature. In fact, the finance minister only recently suggested that the oil bonds were holding her back from cutting taxes on petrol and diesel. And while there is some truth to this statement, it is also not entirely accurate.

But before we get to that bit, let’s see why the current government feels miffed with this whole exercise. For starters, they have been paying close to 10,000 crores in yearly interest payments for a while now. This year they’ll likely be paying 20,000 crores. And if that weren’t bad enough already, know that they’ll have to keep paying large sums of money over the next few years (if they continue to stay in power). For instance, in the financial year 2024–2025, the government is expected to pay close to 59,000 crores.

In the current financial year, the government is expected to pay close to 8 lakh crores in settling interest payments alone. This isn’t interest paid on oil bonds. This is interesting the government is obligated to pay on every kind of borrowing. Therefore, it’s a bit difficult to argue that the 10,000-crore payment on oil bonds is what’s really stretching the government’s coffers. More importantly, the government made 3.45 lakh crores from excise duty on petrol and diesel during the last financial year. That’s roughly 34 times the interest the government paid on oil bonds during the same period.

So, while it is true that these oil bonds aren’t pleasant to deal with, there’s a whole host of other reasons why the government cannot cut taxes right now. GST collections have been subpar. Covid has forced the government to borrow beyond its means. The government has had a horrid time trying to sell its prized assets. And they simply don’t have a lot of money to spare right now.

Therefore, emphasizing on the statement that such record-breaking fuel prices are because of oil bonds is a bit inappropriate rather, it is lot more complicated than that. There are multiple factors at play here and to reduce this complex equation to a single variable is a bit of a disservice really.

As prices of petrol and diesel climb steeply, the Centre has been under pressure to cut the high taxes on fuel. [2]Taxes account for 58 per cent of the retail selling price of petrol and 52 per cent of the retail selling price of diesel.

However, the government has so far been reluctant to cut taxes as excise duties on petrol and diesel are a major source of revenue, especially at a time the pandemic has adversely impacted other taxes such as corporate tax. The government is estimated to have collected more than Rs 3 lakh crore from tax on petrol and diesel in the 2020-21 fiscal year.

The Modi government has blamed the UPA regime for its inability to cut taxes. It pointed out that the bonds issued by the Manmohan Singh government have weakened the financial position of the oil marketing companies and added to the government’s fiscal burden now.

Budget documents show that such bonds will be up for redemption over the next few years — beginning with two to be redeemed in the current fiscal year — till 2026.

The government has to repay a principal amount of Rs 10,000 crore this year, according to these documents.

a close up of a sign[3]

CLOSING STATEMENT

Emphasizing on the statement that such record-breaking fuel prices are because of oil bonds is a bit inappropriate rather, it is lot more complicated than that. There are multiple factors at play here and to reduce this complex equation to a single variable is a bit of a disservice really.


REFERENCE

[1] finshots.in

[3] www.msn.com

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