OIL BONDS AND THEIR RELATION WITH INCREASED OIL PRICES

WHAT ARE BONDS?
In the simplest terms, a bond is a contract between companies, and they issued it because they need to borrow a large amount of money. Then, they issue bonds and investors buy them. And, then after a point of time, the bond issuer pays back the money to the investors.

WHAT ARE OIL BONDS AND WHY THEY ARE IN THE NEWS?

UPA government in 2012-13, has issued oil bonds totalling Rs 1.34 lakh crore to their state fuel retailers instead of paying directly from the Budget in a motive of to control fiscal deficit.

Recently, the NDA government has claimed that they can’t reduce the taxes on petrol and diesel because they are bearing the burden of payments of the bonds that were issued by the UPA government to provide subsidies.

And, now to repay the principal and interest amounts of those bonds, the excise duty will still remain high to manage the finances.

Finance Minister Nirmala Sitharaman -” The Government of Prime Minister Narendra Modi is today paying for the oil price reduction done by the UPA in 2012-13”. She has also mentioned that for the last seven fiscals the government is paying interest over 9000 crores annually, and at the last, she said if the government does not burden the oil bonds, they will never impose such huge taxes.

PRICES DEREGULATION
Price deregulation means that the government has taken off their role in deciding the fuel prices. Prices of turbine fuel were deregulated in 2002, for petrol in 2010 and for diesel in 2014 respectively.

But, why was deregulation needed? What were the problems? The problems are from both facets, retailers like BPCL, Indian Oil Corporation, HPCL were complaining that they were not getting the compensation on time and as a result, their finances are in negative digits at the end of the day.

The government had also a duty to pay them subsidies, to maintain the oil prices, and as a result, there remains the fiscal deficit. Well, this is not the only reason for the fiscal deficit, but one of the reasons for it.

Before the deregulation of the prices, the government used to intervene in fixing the prices of diesel and petrol, so that oil marketing companies remain in positive figures. So, this compensation to the companies is done by the government.

So, it means when prices are deregulated, then their price is decided on the basis of market mechanism that is demand and supply and thus linked to the global crude prices.

But, it was seen that even when prices of the global market are low, then still the prices in India are high, this is because of the impositions of the taxes and levies, in an aim to earn more revenues.

HOW MUCH TAXES ARE COLLECTED?
It should be very clear that taxes, duties, penalties etc are all the revenue for the government. The Center’s revenue from the taxes on crude oil and petroleum products jumped 45.6% in 2020-21 and made Rs. 4.18 lakh crores. Excise duty on the petroleum products jumped over 74% year on year and made Rs. 3.45 lakh crore in 2020-21.

In the financial year 2019-20, the Central government has collected taxes worth 2.87 lakh crore and which was severely increased in 2020-21. The state government in the same financial year had collected taxes worth 2.20 lakh crore, and it decreased in 2020-21 by 1.6 % and made 2.17 lakh crores.

The Centre and a number of states have increased duties on petrol and diesel as a way to boost revenues during the period of the Covid pandemic that curtailed economic activity. State and central levies account for about 55.4% of the retail price of petrol and 50% of the price of diesel in Delhi.

But, what they are going to pay is not even one-tenth of the excise duty that is received by the Central government.

TAX PETROL DIESEL
2010 2021 2014 2021
CUSTOM DUTY 7.50% 2.5% + 10% (Social Welfare Surcharge) 2.5% + 10% (Social Welfare Surcharge)
 EXCISE DUTY Rs 14.35 32.9 Rs 9.48 Rs 31.80
 Price Rs 44.72(Delhi) Rs 86.30(Delhi) Rs 57.28 Rs 76.48(Delhi)
NOTE –
1. All values are taken around the time, when the Budget was presented before the nation.
2. All figures are for one litre.

ACTION PLAN OF THE GOVERNMENT TO PAY OFF THE AMOUNT OF BONDS

The interest on the number of oil bonds is around 70 crore, from the last 7 years. And, out of the principal amount of Rs 1.34 lakh crore, only Rs 3500 crore is paid off, and still, payment of Rs 1.30 lakh crore is due, and the government has decided to pay off the principal amount by the year 2025-26.

The government will repay 10,000 crores in the current fiscal year, 31,150 crores in 2023-24, and 52,860 crores in 2024-25 and the remaining 36,913 crores in 2025-26.

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2 thoughts on “Oil Bonds and their relation with increased oil prices

  • Utkarsh Agarwal

    Nice content, full of knowledge

    September 11, 2021 at 4:38 pm
  • Quickbytes

    Thank you for your comment. Keep checking our upcoming burning topics on current affairs.

    September 15, 2021 at 12:06 am
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