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Are oil bonds to blame for high fuel prices?


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.


GS-III: Indian Economy (Mobilisation of Resources, Growth & Development of Indian Economy, Taxation)

Dimensions of the Article:

  1. What are Oil Bonds?
  2. Reason for issuing such oil bonds
  3. Why were they issued only up to 2010?
  4. Recent Developments regarding 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 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.

Reason for Issuing such Oil 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.

Why were they issued only up to 2010?

The UPA government deregulated petrol pricing in 2010, ending under-recovery on the fuel, and OMCs stopped suffering losses on every litre of diesel they sold from 2014.

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.
  • 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.

Recent developments regarding Oil Bonds

  • 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.

Taxation and Pricing of Petrol and Diesel in India

-Source: The Hindu

February 2024