Explained | Are oil bonds to blame for high fuel prices?

The story so far: Union Finance Minister Nirmala Sitharaman recently repeated a refrain that the Centre had been unduly burdened by the cost of having to service ‘oil bonds’ issued by the UPA government, and it was this financial commitment which had mainly constrained the government’s ability to reduce excise duty and other Central levies on petroleum products so as to lessen the burden on consumers. Interacting with the media on August 16, Ms. Sitharaman termed the actions taken by the then Prime Minister Manmohan Singh’s government as “trickery” and said: “Oil bonds worth ₹1.44 lakh crore were issued by the UPA to show reduced oil prices in 2013. Who is paying for it, the Modi 2.0 government.” She added, “Today, you are asking me why we are not reducing the prices. I am subsidising the reduction they had offered. So far, ₹70,195.72 crore has been paid as interest on outstanding bonds worth around ₹1.31 lakh crore. Another ₹37,000 crore more is payable as interest till 2025-26, taking the interest alone close to ₹1 lakh crore.”

Also read | Oppn rebuts FinMin on cost of UPA oil bonds

What are these oil bonds ?

Between 2005 and 2010, the government issued long-dated Special Securities, totalling about ₹1.4 lakh crore, to oil marketing companies (OMCs), including Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. These debt securities or bonds, which carry coupons ranging from 6.35% to 8.4%, were issued in lieu of cash subsidy to cover the under-recovery that OMCs sustained on account of selling petroleum products below cost. The bonds paid an annual interest to OMCs and on maturity, the face value of the bonds, too, would accrue to them. The then government opted to issue these bonds so as to reduce the annual fiscal burden and stagger the liability over an extended period of time.

Why were they issued only up to 2010?

The UPA government deregulated petrol pricing in June 2010, ending under-recovery on the fuel, and OMCs stopped suffering losses on every litre of diesel they sold from October 2014. During the five-year period that the oil bonds were issued, the price of a barrel of the Indian basket of crude oil averaged $70.15, according to the data on the website of the Petroleum Planning & Analysis Cell (PPAC). The retail selling price of petrol ranged from a low of ₹37.99 to a peak of ₹50.62 (in July 2008) over the same period.

What is the link between oil cost and retail fuel prices?

Besides the price of crude oil that is processed into the respective fuels, there are Central and State levies and dealer commissions that get added on to finally feed into the pump price of the petroleum products. The price of the Indian basket of crude oil kept rising during the UPA years, starting at an annual average of $39.21 in 2004-05 and climbing to a high of $111.89 in 2011-12. Prices eased slightly thereafter to an annual average of $105.52 in 2013-14, before the government headed by Prime Minister Narendra Modi assumed office in May 2014. Since 2014-15, when a barrel on average cost $84.16, crude prices have been on a downtrend and fell to $44.82 in 2020-21. Excise duty and related Central levies have, however, risen sharply and constituted 32% or almost a third of the pump price of petrol sold in Delhi as on August 16 this year, compared with just 14% in May 2014. State taxes have increased at a more gradual pace and risen in Delhi to 23% of the pump price, from 17% in May 2014.

How relevant is the Minister’s contention?

The Centre has consistently derived far higher returns from excise duty and other levies than the expenditure it has so far incurred in relation to the bonds. Its receipts by way of excise duty alone almost doubled from ₹99,068 crore in 2014-15 to ₹1,78,477 crore in 2015-16, and was provisionally estimated at ₹3,71,726 crore in 2020-21, according to PPAC data. In contrast, while the principal outstanding for the bonds has barely changed over the last seven years — marginally declining from ₹1.34 lakh crore as of March 2014 to ₹1.31 lakh crore as of March 2021 — the interest outgo, by the Minister’s own account at a little over ₹70,000 crore, averages to just about ₹10,000 crore a year.