The price of petrol and diesel has sustained at a record high and people across the country are experiencing its pinch. Nevertheless, Finance Minister Nirmala Sitharaman recently mentioned that she would not be able to slash excise duties on prices of petrol and diesel anytime soon quoting the load of UPA-era oil bonds. Of late, she declared that the Union government has to assume the liability of payments in lieu of oil bonds issued by the UPA government to subsidize fuel prices and a substantial amount of money is going for interest payment and principal settlement.
In India, the cost of a liter of petrol or diesel has three elements – the base price of the fuel, the excise duty imposed by the Union government, a dealer’s commission, and the VAT imposed by states. VAT is one of the only sources of income for states, as it doesn’t fall into the ambit of GST and doesn’t go into the Consolidated Fund of India.
Like other debt bonds, oil bonds are debt instruments issued to investors or lenders when the government, or corporate entities, borrows money for a specified tenure of time at a fixed interest rate. Basically, bonds are securities offered by borrowers to lenders comprising particulars of any loan obtained and an assurance to repay them. Precisely, oil bonds are unique kinds of bonds that are issued to OMCs namely Indian Oil, Hindustan Petroleum, and Bharat Petroleum. These entities have received oil bonds from the government in lieu of cash grants.
On August 16, the finance minister said that if she did not have the burden to service the oil bonds, she would have been able to reduce excise duty on fuel. She also added that the previous government has made our job difficult by issuing oil bonds and she is paying through her nose for the oil bonds.
Prior to 2010, the Union government artificially decreased the fuel prices when the price of crude oil was high, and the price was not deregulated. Because the prices were subsidized, the government had to pay that subsidy to Oil Marketing Companies (OMCs), namely Indian Oil and Bharat Petroleum. The weight of subsiding the cost would have gone onto the refiner, the OMC along with the end consumer. However, in preference to paying them the subsidies in advance, the government instead issued oil bonds. The government would pay interest annually on these bonds, and finally, pay them off on the maturity date. With this strategy, the government managed to keep its fiscal deficit in control by not paying all the money direct. However, its total debt amplified. Prior to the UPA government, the NDA government under Atal Bihari Vajpayee also issued oil bonds. Altogether, between 2005 and 2012 bonds of Rs 1.44 lakh crore have been issued to OMCs.
In the present financial year 2021-2022, the government has increased the price of petrol 39 times and decreased once, while increased diesel price 36 times and decreased twice. In 2020-2021, the price of petrol was raised 76 times and reduced 10 times and that of diesel increased 73 times and decreased 24 times. The Central government and many State governments have considerably raised duties on petrol and diesel to enhance revenues in view of the Covid-prompted limitations that shortened economic activity.
According to the government data, the Central government’s proceeds from taxes on crude oil and petroleum products hopped 45.6% in 2020-2021 to Rs 4.18 lakh crore. Excise duty on petroleum products soared more than 74% year-on-year to Rs 3.45 lakh crore in 2020-2021, due to a steep increase in fuel prices in March and May 2020. In the current financial year 2021-2022, the pickings could well exceed Rs.4 lakh crore considering first-quarter revenues of Rs 94,181 crore.
Oil Bond Outgo
The Centre’s cash expenditure towards interest payments on oil bonds has continued at around Rs 10,000 crore per annum. The interest payment on oil bonds paid in the previous seven years (between 2014-2015 and 2020-2021) adds up to Rs 70,195.72 crore. As of March 31, 2021, the outstanding balance on oil bonds to be settled by the government stood at Rs.1.3 lakh crore. The government has declared that during the next five financial years from 2021-2022 to 2025-2026 it has to disburse a total interest of Rs 37,340.44 crore, spread over each fiscal. It also has to pay the unsettled Rs 1.3 lakh crore of principal, of which Rs 10,000 crore is payable in 2021-2022, Rs 31,150 crore in 2023-24, Rs 52,860.17 crore in 2024-25, and Rs 36,913 crore in 2025-26. Therefore, the total cash outlay due to the oil bonds between 2014-2015 and 2025-2026 at Rs 2.42 lakh crore – Rs 73,695 crore in interest and principal settled till now; Rs 37,340.44 crore in interest to be paid between the financial year 2021-2022 to 2025-2026 and the principal outstanding of Rs 1.3 lakh crore.
Stop the Blame Game
Strong leaders will face the challenge and get things done. Weak leaders will blame others and escape from their failures. Between 2009-14, the government headed by Dr. Manmohan Singh disbursed Rs.53,269 crore as interest amount for oil bonds. However, Dr. Singh did not blame the Vajpayee government for issuing the bonds, neither he made any propaganda out of this to increase fuel prices. Despite a surge in crude oil price, he kept the price of petrol and diesel below the Rs. 70 mark.
Although having been in power for seven successive years, the ruling government constantly criticizing the errors of precursors. It does not cut the mustard. The government cruelly increased taxes on fuel at the height of the pandemic the previous year. Due to this, revenues from excise duties surpassed the budgeted estimate. Just a portion of these rich earnings covers both principal and interest on the Rs1.3 lakh crore outstanding oil bonds. When taxpayers chipped in with precious money, helping the government tide over its misery of the past fiscal, the finance minister’s justification is upsetting.
Nonetheless, the finance minister would have won reliability and taxpayers’ empathy for her stubborn viewpoint just by being honest. For one, her action to clean up the balance sheet, accounting for all off-budget items this year, shot up the fiscal deficit, sparing tiny room for further borrowings. It means the government has to factually scrape the foot of both direct and indirect taxation. Two, the major portion of fuel tax revenue comprises road and infrastructure cess, all of which will be employed to construct highways and others. This much-warranted capital allocation aids economic revival and it’s only sensible that the government communicates the necessity for high taxes to citizens, who in any case are tolerating the agony. There’s no superior way to overcome taxpayers’ dissatisfaction and opposition condemnation.
The government should transfer the benefit of decreased global prices of crude oil to end customers by lessening the prices of petroleum products namely petrol, diesel, and cooking gas cylinders. It should attempt to include all petroleum products in the GST ambit. The government should instantly reverse or reduce the excise duty raised on petrol and diesel. Although the Union Petroleum and Natural Gas minister recently said that the government is “sensitive” towards the prices of petroleum products and is implementing all probable measures to address the matter, only big talks don’t bring change. The need of the hour is a steady decrease in fuel taxes, which are unreasonably high, and not an argument on whether the Centre or states should act on this.
If the finance minister continues singing the same song and blames the UPA government for the oil bonds load, surely the math does not bear out her.