OIL BONDS CONTROVERSY

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 OIL BONDS CONTROVERSY

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• Fuel on fire: Indians paid upwards of Rs.100 a litre for both petrol and diesel, something unprecedented in history. To protect itself from public anger, the Modi government cited the instrument of oil bonds issued by the UPA regime under then PM Dr Manmohan Singh to justify its inability to reduce the high incidence of taxes on petroleum products.
• What are oil bonds: These are special securities issued by the government to oil marketing companies (OMCs) in lieu of cash subsidy. These bonds are of a long-term tenure like 15-20 years and oil companies are paid interest. 

1. Before the complete deregulation of petrol and diesel prices, OMCs were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price. (that is not the case in 2021)
2. This ‘under-recovery’ was compensated through fuel subsidies allocated in the Union budget. But between 2005 and 2010, the UPA government issued oil bonds to the companies amounting to Rs 1.4 lakh crore to compensate them for these losses.

• Despite global crude oil prices being significantly low as compared to 2011-12, customers are paying more at fuel stations than earlier. 
• The average price of crude in March 2011 was $104.42 per barrel while the price of petrol in the national capital was Rs 58.37 / litre. 
• On September 21, 2018, customers in Delhi had to dish out Rs 82.41 per litre despite crude prices retailing for $70.78 per barrel. Petrol prices have already breached the Rs 90-mark in Mumbai.
• End users are paying more, and the government alleges that the pinch felt now is on account of feckless borrowing to subsidise prices in the past. 
• In 2021, it’s normal to hear Rs.100 a litre price all over India!
• The logic: Issuance of such bonds is done when the government wants to delay the fiscal burden of such a payout to future years. The govt. does not want to breach the FRBM targets of deficits.
• Below the line: Such bonds are ‘below the line’ expenditure in the Union budget and do not impact that year’s fiscal deficit, but they do increase the government’s overall debt.
• What about later years: Interest payments and repayment of these bonds become a part of the fiscal deficit calculations in future years.
• The situation in 2021: Of the huge rise in fuel prices, taxes account for 58 per cent of the retail selling price of petrol and 52 per cent of the retail selling price of diesel. Despite many calls from public, government did not cut taxes as excise duties on fuel remained a major source of revenue, especially in pandemic time that adversely impacted other taxes such as corporate tax. 
• Huge collection: The government collected more than Rs 3 lakh crore from tax on petrol and diesel in the 2020-21 fiscal year alone. 
• Blame the past: The Modi government has blamed the UPA regime for its own present inability to cut taxes. It says that the oil bonds have weakened the financial position of the oil marketing companies (OMCs) and added to the government’s fiscal burden now. This argument keeps surfacing every now and then.
• What is the truth: Budget documents show 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.
• Oil bonds are issued by the government to compensate oil marketing companies (OMCs), fertiliser companies and the Food Corporation of India (FCI) for losses borne by them
•  They are like government securities
• These have a long maturity period extending over 15-20 years. Interest payments will be due at fixed intervals during the tenure of the bond
• These debts are not accounted in the fiscal deficit number of the issuing year
• Oil bonds do not qualify as statutory liquidity ratio (SLR) securities, making them less liquid when compared to other government securities
• Oil bonds can be traded for liquid cash by sale in the secondary market to insurance companies, banks, and other financial institutions
• UPA government issued oil bonds as a substitute for subsidies between 2005 and 2010. High crude prices and the blowback from the recession of 2008 increased pressure
• By raising capital through bonds, these payments could be made in a deferred manner without causing a major escalation in prices, thus insulating customers.
• How it will work out: The government has to repay a principal amount of Rs 10,000 crore this year, according to Budget documents.

1. The Modi government has paid around Rs 10,000 crore annually as interest over the last decade, according to a reply by petroleum minister Dharmendra Pradhan in December 2018.
2. The government is likely to pay a similar amount of interest for the current fiscal as well.
3. So, the total outgo in the last few years has been Rs 10,000 crore annually, it will be around Rs 20,000 crore in the current fiscal.

• What about other bonds’ issuance: Besides oil bonds, the UPA era saw the issuance of fertiliser bonds from 2007 to compensate fertiliser companies for their losses due to the difference in the cost price and selling price.
• Did Modi govt. issue such bonds: Over the years, the Modi government has issued bank recapitalisation bonds to specific public sector banks (PSBs) as it looked to meet the large capital requirements of these PSBs without allocating money from the budget.

1. Since 2017-18, the government infused more than Rs 2.5 lakh crore of recapitalisation bonds to banks and paid interest of more than Rs 20,000 crore over these three years.
2. The Modi government used the National Small Savings Fund (NSSF) to finance its food subsidy bill outside of the budget. Beginning 2016-17 and till March 2021, the Food Corporation of India (FCI) borrowed from NSSF to finance the food subsidy. However, the government repaid the entire amount last fiscal to end this lack of transparency.

• So what about the claims: The government’s claim that prices are high due to higher oil bond redemptions and interest payments is completely wrong. 

1. It has collected huge sums (lakhs of crores) in higher taxes whereas the redemptions are very puny compared to that
2. It has yet to make full repayments 

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