Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Key Phrases: oil bonds, oil marketing companies, domestic consumers, retail price, interest payment, payout, excise tax, promissory note, fiscal deficit.

Why in News?

• The Finance Minister has said the government cannot bring down taxes and thus oil prices because it has to pay for oil bonds issued by the previous(UPA) government.

What are Oil Bonds?

• When fuel prices were too high for domestic consumers, governments in the past often asked oil marketing companies (OMCs) to avoid charging consumers the full price.
• But if oil companies don’t get paid, they would become unprofitable. To address this, the government said it would pay the difference.
• But again, if the government paid that amount in cash, it would have been pointless, because then the government would have had to tax the same people to collect the money to pay the OMCs.
• This is where oil bonds come in. An oil bond is an IOU(I Owe You), or a promissory note issued by the government to the OMCs, in lieu of cash that the government would have given them so that these companies don’t charge the public the full price of fuel.
• An oil bond says the government will pay the oil marketing company the sum of, say, Rs 1,000 crore in 10 years. And to compensate the OMC for not having this money straightaway, the government will pay it, say, 8% (or Rs 80 crore) each year until the bond matures.
• Significance: By issuing such oil bonds, the government of the day is able to protect/ subsidise the consumers without either ruining the profitability of the OMC or running a huge budget deficit itself.
• As Table below shows, when the present government took charge in 2014, there were bonds worth Rs 1.34 lakh crore that had to be paid between 2015 and 2026.

How much of the previous government oil bonds has the present government paid back?

• As discussed above, there are two components of oil bonds that need to be paid off:
  • The annual interest payment, and
  • The final payment at the end of the bond’s tenure.
• By issuing such bonds, a government can defer the full payment by 5 or 10 or 20 years, and in the interim just pay the interest costs.
• Table 1 shows that between 2015 and 2021, the present government has fully paid off four sets of oil bonds - a total of Rs 13,500 crore.
• Each year, the government had also had to pay the interest rate on all bonds that have not matured.
• Chart 1 shows the amount paid towards interest payment each year. Between 2014 and 2022, the present government has had to spend a total of Rs 93,686 crore towards interest as well as the principal.

Is this amount large enough to restrict the Finance Ministry from bringing down the taxes?

• Compare the payout with the money that the government earned from all kinds of taxes that it levied on petroleum products.
• Chart 2, showing total revenues earned by the Centre and state combined from sector, this provides this information
• There are three ways to answer the question as to whether the amount is large enough to restrict a reduction in taxes.
• The first is to observe that total payout was just 7% of the total revenues in 2014-15. As the years progressed, this percentage has come down because taxes generated from this sector have soared.
• The second is to look at the total revenue earned by the government (both Centre and states) between 2014 and 2022 from taxing petroleum products.
• This amount is more than Rs 43 lakh crore. That means the total payout by the present government till date on account of oil bonds is just 2.2% of the total revenues earned during this period.
• The third way is to note that the total amount of revenue earned by the Centre from just one kind of tax— excise tax — in just — 2014-15 — was more than Rs 99, 000 crore.
• In other words, while the present government has had to pay for oil bonds, the payout is not big compared to revenues earned in this sector.

Conclusion

• Oil bonds were issued by several governments in the past. But the ones in question now are the ones which the previous(UPA) government issued.
• In a relatively poor country like India, all governments are forced to resort to the use of bonds of some kind.
• Take the current government itself, which has issued bonds worth Rs 2.79 lakh crore (twice the amount of oil bonds) to recapitalise public sector banks. These bonds will be paid by governments till 2036.
• According to N R Bhanumurthy, Vice-Chancellor of Dr B R Ambedkar School of Economics University in Bengaluru, the main wisdom while issuing bonds is for a government to employ this tool towards increasing the productive capacity of the economy.

Sources: Indian Express

Mains Question

Q. What are oil bonds? Why were they issued? (150 words).