Are UPA’s oil bonds to blame for high fuel prices?
Fuel prices continue to be at record levels in the country. The fact that the government has not reduced the additional taxes it imposed during the pandemic is an important reason for prices being at their current levels.
While speaking about rising input prices across manufacturing and service sectors even in face of weak demand, RBI’s Monetary Policy Committee in its latest resolution urged central and state governments to reduce taxes on petrol and diesel. “With crude oil prices at elevated levels, a calibrated reduction of the indirect tax component of pump prices by the Centre and states can help to substantially lessen cost pressures”, the MPC resolution said.
The Tamil Nadu government reduced its taxes to slash the price of petrol by ₹three per litre in its budget which was presented last week.
Finance minister Nirmala Sitharaman has blamed the fiscal burden of oil bonds issued during the United Progressive Alliance (UPA) government’s term for the inability to provide relief from high petrol-diesel prices. “We’ll still have to pay interest of ₹37,000 crores by 2026. Despite interest payments, principal outstanding of over 1.30 lakh crores is still pending. If I didn’t have the burden of oil bonds, I would have been in a position to reduce excise duty on fuel”, she said in an interaction on August 16. Is there merit in the finance minister’s claims?
What are oil bonds?
Oil bonds are special debt instruments that were issued by the UPA government to oil marketing companies (OMCs) in place of a cash subsidy between 2005 and 2010. Since the oil companies were not free to fix their own price for petrol (before 2010) and diesel (before 2014), they were at times selling fuel below the international market price. To compensate for this loss, the companies received cash subsidies from the government. In view of rising international crude prices between 2005 and 2010, the UPA government issued total oil bonds worth around 1.44 lakh crores in order to subsidise retail fuel prices. The annual average price of India’s crude oil basket (COB) increased from $55.72 per barrel in 2005-06 to $ 62.46 (2006-07), $ 79.25 (2007-08) and 83.57 (2008-09) before falling to $69.76 in 2009-10. In three out of these five years, the COB price was higher than what it is currently ($68.92 per barrel according to data from petroleum ministry on 17 August,2021). However, retail prices of petrol and diesel were much lower than what they are today. The maximum price per litre of petrol and diesel in Delhi in 2005-06 was ₹43.49 and ₹30.45 respectively. This changed to 47.43 for petrol and 35.47 for diesel in the year 2009-10.
To be sure, the rupee price of COB has been increasing because of the depreciation of the rupee, which was 44.27 per dollar(average) in 2005-06, fell to 47.44 per dollar in 2009-10 and is at 74.28 per dollar at the moment (as on 17 August).
What is the current fiscal burden of oil bonds?
As admitted by the finance minister, the central government has to pay around ₹1.7 lakh crore for these accumulated liabilities. However, the 2021-22 union budget shows that the government does not intend to pay all of them in the current fiscal year. Budgetary allocation for oil bonds in the current fiscal year is just ₹9989.96 crore in interest payments. This is only a fraction of the windfall gain to the union government from the additional petroleum taxes. Union excise duties, which comprise the bulk of petroleum taxes increased from ₹2,39,452 crores in 2019-20 to ₹3,89,677 crores in 2020-21 (provisional numbers) and are expected to be ₹3,35,000 crores in 2021-22, as per Budget Estimates. If the government wanted, it could have used last year’s proceeds to settle almost all of the pending liabilities from oil bonds. As soon as the principal component is paid, interest liabilities will automatically cease to exist.
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.
Can the current government claim high moral ground on petrol-diesel prices?
It is a fact that the UPA incurred liabilities to provide relief from petrol-diesel prices. Reduction of petrol-diesel prices is something the Bharatiya Janata Party (BJP) consistently demanded when it was in the opposition. Also, given the fact that both petrol-diesel prices are now deregulated (at least in principle), the government does not even have to incur a subsidy burden to bring down prices. What it will take to reduce petrol-diesel prices is the union government sacrificing its windfall tax gains. With its revenue under pressure, it may be hesitant to do so. That, not oil bonds, would appear to be the problem.