The Centre has argued that it cannot reduce taxes on petrol and diesel as it has to bear the burden of payments in lieu of oil bonds issued by the previous UPA government to subsidize fuel prices.

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 typical 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.
• This ‘under-recovery is typically compensated through fuel subsidies allocated in the Union budget.
• However, 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.

Why do governments issue 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.

Backgrounder: Deregulation of fuel prices

• 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.
• 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.

Impact: Loss of consumers

• While oil price deregulation was meant to be linked to global crude prices, Indian consumers have not benefited from a fall in global prices.
• 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.

Why are the Oil Bonds in news?

• As prices of petrol and diesel climb steeply, the Centre has been under pressure to cut the high taxes on fuel.
• 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 blame game

• The present 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.
• It is an argument that has been often repeated since 2018.

What budget documents show

• 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.
• The government has paid around Rs 10,000 crore annually as interest over the last decade.
• The government is likely to pay a similar amount of interest for the current fiscal as well.

Is the issuance of such special securities restricted to the UPA era?

• Besides oil bonds, the UPA era also saw the issuance of fertilizer bonds from 2007 to compensate fertilizer companies for their losses due to the difference in the cost price and selling price.
• However, the issuance of such special securities is not limited to the UPA regime.
• Over the years, the Modi government has issued bank recapitalization 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.

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