The price of petrol and diesel have remained at record high levels and citizens across the country have felt its pinch. However, Finance Minister Nirmala Sitharaman said that she would not be able to cut excise duties on fuel anytime soon. The reason for this? On Monday, August 16, she stated it was because the Union government has to pay off oil bonds issued during the UPA regime. "A significant amount is going for interest payment and principal repayment. What unfair burden on me," she said.
Oil bonds are a kind of special securities, instruments issued by the government to borrow money, and have a date of maturity and carry an interest rate. The price of fuel in India is technically decontrolled and supposed to be linked to global crude price, and is not as volatile as the global crude price. But the reason fuel prices haven't reduced for the customer when prices go down, governments hike the excise duty. This way, the price of fuel paid at the pump doesn't go down when the crude oil is reduced, but increases when crude oil prices go up.
Prior to 2010, when the price of crude oil was high and price was not decontrolled, the Union government artificially reduced the price. As the price was subsidised, the Union government had to pay that subsidy to Oil Marketing Companies (OMCs), such as Indian Oil and Bharat Petroleum. The burden of subsiding the cost would have gone onto the refiner, the OMC as well as the end consumer. Instead of paying them the subsidies upfront, the government instead issued oil bonds. The government would pay an annual interest on these bonds, and eventually when they mature, pay them off. By not paying all the money upfront, the government kept its fiscal deficit in check, but increased its overall debt down the line, just like any other security that is issued. Not only the UPA, the NDA-government under Atal Bihari Vajpayee prior to the UPA also issued oil bonds. In total, bonds of Rs 1.44 lakh crore have been issued to OMCs between 2005 and 2012.
On August 16, Nirmala Sitharaman said that it is the interest on these oil bonds that are being paid now. "If I did not have the burden to service the oil bonds, I would have been in a position to reduce excise duty on fuel," she said. "The previous government has made our job difficult by issuing oil bonds. Even if I want to do something I am paying through my nose for the oil bonds,” she added.
But is the interest on oil bonds the reason for the hole in your pocket? Not quite.
The cost of a litre of petrol or diesel in India is made up of a few components — the base price of the fuel itself, the excise duty levied by the Union government, a commission to the dealer, and the VAT levied by states. This is one of the only sources of revenue for states, as it doesn’t fall under GST and doesn’t go into the Consolidated Fund of India.
During the pandemic, excise duty on petrol was hiked from Rs 19.98 per litre to Rs 32.90 last year to recoup gain arising from international oil prices plunging to multi-year lows as the pandemic pushed demand. The same on diesel was raised to Rs 31.80 from Rs 15.83 a litre. This was between March 2020 and February 2021, according to a written reply by Minister of State for Petroleum and Natural Gas Rameswar Teli in the Lok Sabha.
Nirmala Sitharaman said on Monday that of the Rs 1.34 lakh crore in oil bonds, only Rs 3,500 crore of principal has been paid and the remaining Rs 1.3 lakh crore is due for repayment between this fiscal and 2025-26.
This amount of Rs 1.3 lakh crore being due isn’t news to the dispensation. In a Rajya Sabha answer in 2018, Minister for Petroleum and Natural Gas Dharmendra Pradhan said that the outstanding balance for oil bonds was roughly Rs 1.30 lakh crore.“The outstanding GoI Special securities are interest bearing obligations having a fixed coupon rate and are being paid on half yearly basis as and when the coupon payments fall due. The annual aggregated amount of Rs 9,989.96 crore was paid every year during 2015-16 to 2017-18 and the similar amount is required to be paid in the current financial year,” he said. He added that a provision for repayment of the special securities to OMCs would be made available in the year of their maturity.
Going back to when the current dispensation came to power in 2014, the pending liabilities for oil bonds were Rs 1,34,423 crore, according to Budget documents. Two bonds totalling Rs 3,500 crore matured in 2015, leaving dues of Rs 1,30,923 crore.
The Union government has not had to pay any principal amount between 2015 and now, and has only had to pay the interest. The interest has been Rs 9,989 crore every year since 2015-16.
As per the Budget, under the ‘Special Securities Issued To Oil Marketing Companies In Lieu Of Cash Subsidy’ heading, the bonds mature between October this year and March 2026. Two bonds will mature this year, a total of Rs 10,000 crore. Another Rs 31,150 crore is due to be repaid in 2023-24, Rs 52,860.17 crore in the following year and Rs 36,913 crore in 2025-26.
Compare this to the excise duty collected on fuel between 2014-15 and the provisional data for 2020-21, according to the Petroleum Planning and Analysis Cell. In 2014, excise levied on fuel gave the government Rs 99,068 crore. In 2020-21, it stood at Rs 3,71,726 crore.
Interest on oil bonds is a small part of the Union government’s overall interest to be paid in a year. Excise collections on fuel also far exceed the principal and interest to be paid on oil bonds.
Minister of State for Petroleum and Natural Gas Rameswar Teli had last month told Parliament that the Union government's tax collections on petrol and diesel jumped by 88% to Rs 3.35 lakh crore in the year to March 31, from Rs 1.78 lakh crore a year back.
But does that mean that the oil bonds can be paid off immediately? Economist Ajit Ranade said that bonds are issued for longer tenures, such as 15-20 years, and the money is raised through the bond market with a certain fixed rate of interest. If one were to pre-pay, he said it could happen in two scenarios — one where the bond itself has a provision where it can legally be paid back earlier and the bond can be extinguished; or when the government is in a fiscal surplus.
“If you want to pre-pay, that means you will have to have enough money in your coffers to be able to dole out that cash and relieve the bond. But, the Indian government is constantly under fiscal pressures, so this is not a priority. There's so many other competing demands — such as food security, vaccination, the NREGA, etc. The use of government funds for prepaying something — which is not yet due for maturity — will obviously not be a high-priority item,” he said.
During the pandemic, this hike in taxes last year did not result in any revision in retail prices as they were adjusted because the price of crude fell internationally. Now, international oil prices have soared due to increased demand, leading to an increase in price.