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Talking about the UPA-issued oil bonds- are they really to be blamed for the soaring fuel prices? – excise duty on petrol by 75% and diesel by 101%

Let’s focus our discussion on Oil Bonds today. The country has been struggling with a hike in price levels for quite some time now, and we can say that the situation is going out of hand, both for the short and long term. Back in May when the high retail and wholesale inflation numbers were registered, Central Bank economists were certain that this apparent inflation is transitory, in the sense that it would come down in a short period of time. Cut to August, and the price levels are still causing a headache in the country.

The Consumer Price Index for both retail and wholesale basket of goods has gone up and the targeted inflation bracket seems too far fetched of a deal right now. The Reserve Bank of India has been forced to stay put on inflation has given the trade-off between growth and price levels, and no matter how anaemic the former is at the moment, prioritising growth seems like the only reasonable thing right now.

why upa-era oil bonds are not responsible for modi government's failure to reduce oil prices

Now, we’ve had a rather lengthy discussion on the causes of this inflation, and it all boils down to two things-

  1. The stimulus led to global demand created in the advanced economies and the partial mobility restrictions that created a gap between demand and supply, and;
  2. The significant rise in diesel and petrol prices, that raised the overall level of price in the economy.

Today, let’s keep our discussion centred around the second one. For quite a while now, the petrol and diesel prices haven’t come down from the three-digit price numbers and it would be safe to say people are in distress. This concern and distress are being expressed through twitter trends and confidence pessimism, which, to be honest, is the contrary of what the country needs at the moment.

However, in this general hike in fuel price levels, it is perhaps imperative to note that a significant proportion of payment is being made to the state and central government in the form of taxes. And despite constant echoes from the people, the Central government has been fixated on their call of not lowering these tax rates.

The Central government, however, has blamed the UPA issued oil bonds for the government’s inability to lower the fuel prices. This has created quite a buzz about these oil bonds and if they’re really the ones responsible for the current price hikes, or if this is another political blame game where one party pawns off responsibility on the other. Well, let us find out.

are oil bonds to blame for the high fuel prices?

Oil Bonds issue

Allow me to take you through a little history so we can clearly understand the bigger picture. Back during the UPA rule, when the fuel prices were deregulated, petrol, diesel, cooking gas and kerosene were sold at subsidised prices. The term subsidised is the key point here, since it means the government was paying some part of the consumers’ burden from their pocket. However, did they have a pocket this deep?

Well, unsurprisingly, they didn’t. So, instead of having to deepen the cracks in their fiscal resources by paying direct subsidies to oil marketing companies from the budget, the government issued oil bonds worth INR 1.34 lakh crore. This 1.34 lakh crore principal when aggregated with INR 9000 crore of interest payments annually forms a rather large weight on the government’s liabilities of the balance sheet.

Okay, so now we understand what was done, let’s understand why it was done and how it has impacted the current condition.

The major deregulation spree for petrol prices came in 2010 and that for diesel in 2014. Before that, the government had the authority to intervene in setting up fuel prices. A large proportion of this oil bond repayment that the NDA government has to make comes from the 2005-10 period, a time when international crude prices were soaring high.

Therefore, to prevent the fragile Indian economy ahead of the aftermath of the global financial crisis, domestic prices of oil were kept more stable and significantly lower than the international ones, a step necessary for the then condition of the economy. To keep oil prices low at the time, the government had to subsidise the oil marketing companies, which it did through the oil bonds.

So, is the issuing of oil bonds really the antagonist that the NDA government is making it out to be? Well, it didn’t look so during the time, nor when the government so outrightly criticised the UPA government for high petrol and diesel prices after the deregulation.

Now, this just answers one part of the question. Another big question here is if these oil bonds are the reason behind these high fuel prices.

“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,” Sitharaman stated. “Previous government have 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,” said Finance Minister Nirmala Sitharaman, calling this an “unfair burden” on her.

Oh well, this helplessness that the Finance Minister so vociferously claims doesn’t seem to have much merit in its core.

It is true that the government needs to pay approximate INR 1.7 lakh crore for the accumulated liabilities, but it’s not that they are planning to pay it all this year. The budget presented in February of this year showed an expenditure allocation of INR 9989.96 in interest payments for the year.

Well, shouldn’t they have covered this amount already considering the tax rates that have been levied on fuels yet? Apparently, they have. The windfall gains made by the union government from the additional petroleum taxes exceed the amount to be paid for this year. Not only that, if the government wanted, the last year’s proceedings from the tax collections could have completely paid off the principal pending liability on the oil bonds. Once the principal is paid, the cumulative interest liabilities would cease to accumulate.

महंगे तेल ने भड़काई राजनीति, कांग्रेस का आरोप- oil bonds से कई गुना 'मोदी टैक्स' जुटा चुकी है सरकार - the financial express

This increase in union excise duties happened as the central government increased excise duty on petrol by 65% to Rs32.98 per litre and diesel by 101% to Rs31.83 per litre between March 2020 and May 2020 in view of falling crude oil prices.

So, the argument that the Finance Minister cannot lower taxes on fuel due to the interest repayment liabilities doesn’t make much sense now, does it? Looks like the government is trying to cover the fiscal expenditure they had incurred with the advance of the pandemic, the compensation to which is being paid through the taxes levied on the fuel.

The fuel prices are now deregulated, meaning that the government does not even need to pay subsidies to control the prices, which, at the current time, is the need of the hour. All it needs to do is excise lower taxes, or more specifically, the revenue that comes from it.

But is it really the optimal time? Can the government not actually cut taxes on fuel prices? Given the inflation prevailing in the country, it is only feasible that the government lowers its tax rates, as suggested by the experts of the Central Bank as well. While the government can keep passing around the blame of it on the former government, losers at the end of the day are just the people of the country, especially the lower- and middle-income groups.

And about the question of issuing oil bonds, well, to get out of this situation of economic contraction, the current government has issued bonds as well. And experts claim this to be a rather imperative move, given the need for liquidity in the country. And so was the need at the time the UPA government issued the oil bonds.

The purpose of this discussion is to not take sides on some political feud, it was to do some fact-checking for the big claims made for the people’s and the economy’s welfare. While these political parties keep trying to pass the battalion of the blame on one another, the people of the country are going to lose out not only in the short run but in the long haul as well. Choose better and ask better.

Edited by Sanjana Simlai.

Simerleen Kaur

Talk to me about economics, trade, and all things India.

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