Are the UPA-era oil bonds the reason for high fuel prices

Are the UPA-era oil bonds the reason for high fuel prices?*

Before the BJP came to power in 2014, the party leaders and activists used to routinely criticize the UPA &Congress for any increase in prices of Fuel, Gas or other essential commodities.

In fact, *Mehengayi ki maar se janata laachar - abki baar Modi Sarkar* was BJPs then election plank.

Now 8 years down the line, though there is a BJP Govt at the Centre, prices of Gas have doubled, essential commodities keep rising and falling as before and fuel prices keep on going higher and higher...

It is now time for the opposition to attack the BJP and the party is finding it increasingly difficult to answer.

Finance Minister Nirmala Sitharaman, last year on August 16, said that interest and principal repayment on oil bonds issued by the previous Congress led UPA govt. is why it is unlikely that excise duties on fuel can be cut and prices on fuel be brought down.

What she said has come out to be true. Seven months down the line, in March 2022, fuel prices are still booming.

The centre did reduce the excise duty component last year in Diwali and cut prices by Rs. 5/- but the Russia and Ukraine war has again escalated them.

The price of petrol and diesel have remained at record high levels and citizens across the country have felt its pinch. However, Finance Minister Nirmala Sitharaman said that she would not be able to cut excise duties on fuel anytime soon. What was the reason for this?

According to Nirmala Sitharaman, because the Union government has to pay off oil bonds issued during the UPA regime. "A significant amount is going for interest payment and principal repayment. What unfair burden on me," she said.

History.

There are mainly four factors that influence the rise in prices: 1) Crude oil, freight and processing charges to the dealer. 2) Excise duty charged by the government. 3) Dealer commission to the gas station. 4) Value Added Tax (VAT) levied by the state government.

India imports about 82% of required crude oil for its petroleum products. Crude oil is a dark sticky liquid that cannot be used without refining. It is heated until it boils and is then separated into different liquids and gases in a distillation column. This is used to make petrol and diesel. While Brent Crude is the international benchmark price used by the Organisation of Petroleum Exporting Countries (OPEC), West Texas Intermediate (WTI) is the benchmark for United States oil prices. Since India mainly imports crude oil from OPEC countries, (Iraq, Iran, Kuwait, Saudi Arabia and Venezuela) Brent is the benchmark for oil prices in India.

While international crude oil prices determine the cost of fuels in India, it is only one factor contributing to the rise in petrol and diesel.

The main reason for this hike is central and state government taxes.

What are Oil Bonds?

Oil bonds are a kind of special securities, instruments issued by the government to borrow money, and have a date of maturity and carry an interest rate. The price of fuel in India is technically decontrolled and supposed to be linked to global crude price, and is not as volatile as the global crude price. But the reason fuel prices haven't reduced for the customer when prices go down, governments hike the excise duty. This way, the price of fuel paid at the pump doesn't go down when the crude oil is reduced, but increases when crude oil prices go up. 

Prior to 2010, when the price of crude oil was high and price was not decontrolled, the Union government artificially reduced the price. As the price was subsidised, the Union government had to pay that subsidy to Oil Marketing Companies (OMCs), such as Indian Oil and Bharat Petroleum. The burden of subsiding the cost would have gone onto the refiner, the OMC as well as the end consumer. Instead of paying them the subsidies upfront, the government instead issued oil bonds. The government would pay an annual interest on these bonds, and eventually when they mature, pay them off. By not paying all the money upfront, the government kept its fiscal deficit in check, but increased its overall debt down the line, just like any other security that is issued.

Not only the UPA, the NDA-government under Atal Bihari Vajpayee prior to the UPA also issued oil bonds. In total, bonds of Rs 1.44 lakh crore have been issued to OMCs between 2005 and 2012.

Nirmala Sitharaman said that it is the interest on these oil bonds that are being paid now. "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," she said. "The previous government has 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,” she added.

But is the interest on oil bonds the reason for the hole in your pocket? Not quite.

Excise Duty hiked during pandemic 

The cost of a litre of petrol or diesel in India is made up of a few components — the base price of the fuel itself, the excise duty levied by the Union government, a commission to the dealer, and the VAT levied by states. This is one of the only sources of revenue for states, as it doesn’t fall under GST and doesn’t go into the Consolidated Fund of India.

During the pandemic, excise duty on petrol was hiked from Rs 19.98 per litre to Rs 32.90 last year to recoup gain arising from international oil prices plunging to multi-year lows as the pandemic pushed demand. The same on diesel was raised to Rs 31.80 from Rs 15.83 a litre. This was between March 2020 and February 2021, according to a written reply by Minister of State for Petroleum and Natural Gas Rameswar Teli in the Lok Sabha.

Nirmala Sitharaman has said that of the Rs 1.34 lakh crore in oil bonds, only Rs 3,500 crore of principal has been paid and the remaining Rs 1.3 lakh crore is due for repayment between this fiscal and 2025-26.

This amount of Rs 1.3 lakh crore being due isn’t news to the dispensation. In a Rajya Sabha answer in 2018, Minister for Petroleum and Natural Gas Dharmendra Pradhan said that the outstanding balance for oil bonds was roughly Rs 1.30 lakh crore.“The outstanding GoI Special securities are interest bearing obligations having a fixed coupon rate and are being paid on half yearly basis as and when the coupon payments fall due.

The annual aggregated amount of Rs 9,989.96 crore was paid every year during 2015-16 to 2017-18 and the similar amount is required to be paid in the current financial year,” he said. He added that a provision for repayment of the special securities to OMCs would be made available in the year of their maturity.

This is not the first time that the BJP has cited oil bonds to be the reason for the current financial position. 

Going back to when the BJP came to power in 2014, the pending liabilities for oil bonds were Rs 1,34,423 crore, according to Budget documents. Two bonds totalling Rs 3,500 crore matured in 2015, leaving dues of Rs 1,30,923 crore.

The Union government has not had to pay any principal amount between 2015 and now, and has only had to pay the interest. The interest has been Rs 9,989 crore every year since 2015-16. 

As per the Budget, under the ‘Special Securities Issued To Oil Marketing Companies In Lieu Of Cash Subsidy’ heading, the bonds mature between October this year and March 2026. Two bonds will mature this year, a total of Rs 10,000 crore. Another Rs 31,150 crore is due to be repaid in 2023-24, Rs 52,860.17 crore in the following year and Rs 36,913 crore in 2025-26.

Compare this to the excise duty collected on fuel between 2014-15 and the provisional data for 2020-21, according to the Petroleum Planning and Analysis Cell.

In 2014, excise levied on fuel gave the government Rs 99,068 crore. In 2020-21, it stood at Rs 3,71,726 crore.

Interest on oil bonds is a small part of the Union government’s overall interest to be paid in a year. Excise collections on fuel also far exceed the principal and interest to be paid on oil bonds. 

Minister of State for Petroleum and Natural Gas Rameswar Teli has told Parliament that the Union government's tax collections on petrol and diesel jumped by 88% to Rs 3.35 lakh crore in the year to March 31, from Rs 1.78 lakh crore a year back.

But does that mean that the oil bonds can be paid off immediately? Economist Ajit Ranade said that bonds are issued for longer tenures, such as 15-20 years, and the money is raised through the bond market with a certain fixed rate of interest. If one were to pre-pay, he said it could happen in two scenarios — one where the bond itself has a provision where it can legally be paid back earlier and the bond can be extinguished; or when the government is in a fiscal surplus. 

“If you want to pre-pay, that means you will have to have enough money in your coffers to be able to dole out that cash and relieve the bond. But, the Indian government is constantly under fiscal pressures, so this is not a priority. There's so many other competing demands — such as food security, vaccination, the NREGA, etc. The use of government funds for prepaying something — which is not yet due for maturity — will obviously not be a high-priority item,” he said.

During the pandemic, this hike in taxes last year did not result in any revision in retail prices as they were adjusted because the price of crude fell internationally. Now, international oil prices have soared due to increased demand, leading to an increase in price.

How much taxes/duties has the government collected?

The Centre’s revenue from taxes on crude oil and petroleum products jumped 45.6% in 2020-21 to Rs 4.18 lakh crore. Excise duty on petroleum products jumped over 74% year-on-year to Rs 3.45 lakh crore in 2020-21, according to government data.

The Centre’s share in taxes on petroleum products has progressively increased from Rs 2.73 lakh crore in 2016-17 to Rs 2.87 lakh crore in 2019-20. On the other hand, the share of states in taxes on crude oil and petroleum products decreased 1.6% to Rs 2.17 lakh crore in 2020-21 from Rs 2.20 lakh crore in 2019-20. (See table)

The Centre and a number of states have significantly increased duties on petrol and diesel as a way to boost revenues in view of the Covid-induced restrictions 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.

Status of the Oil bonds serviced so far :

The interest on oil bonds paid in the last seven years totalled Rs 70,195.72 crore. Of the Rs 1.34 lakh crore worth of oil bonds, only Rs 3,500 crore principal has been paid and the remaining Rs 1.3 lakh crore is due for repayment between this fiscal and 2025-26.

The government has to repay Rs 10,000 crore in the current fiscal year, another Rs 31,150 crore in 2023-24, Rs 52,860 crore in 2024-25, and Rs 36,913 crore in 2025-26. But this is less than a tenth of the excise duty on petroleum products at Rs 3.45 lakh crore, a majority of which accrues to the Centre.

The Centre’s tax collections in the fiscal year 21-22 have come in handy for making roughly Rs 20,000-crore payments against oil bond dues and interest. This will lower the Centre’s interest outgo on oil bonds over the coming years and is the largest payment that has been made to date in any fiscal year for this purpose. The worrying part, however, is that these bonds were issued when interest rates were high. According to information gathered through a right to information (RTI) application, the interest rate on these bonds range between 6.35 per cent and 8.4 per cent.

This is not the first time for the NDA government to make such a claim. On September 10, 2018, an infographic had been tweeted from BJP's official handle claiming that the NDA government repaid pending oil bonds worth Rs 1.3 crore with an interest of Rs 40,000 crore.

However, this was false too because the BJP government paid only Rs 3,500 crore worth of oil bonds which matured in 2015. This means that oil bonds worth Rs 1.3 lakh crore are still pending.

The UPA and the NDA government have been paying oil bonds for the last 20 years. In its second term, the UPA government paid a total of Rs 53,163 crore in interest for oil bonds in the five-year period between 2009-10 and 2013-14. Whereas, the current NDA government paid a total of Rs 40,225 crore between 2014-15 and 2017-18. The interest payment for 2018-19 was budgeted at Rs 9,989.96. This outstanding amount has not changed since 2015-16.

As for the current financial year, Rs 5,000 crore of bonds are due to be repaid on October 16 and November 28, 2021, respectively. This totals to Rs 10,000 crore.

This means that Rs 10,000 crore worth of bonds of the total Rs 1,30,923 crore of oil bonds, were repaid during the last financial year.

A back of the envelope calculation tells us that the interest to be paid this year should amount to around Rs 9,500 crore. In the current financial year, the government roughly needs around Rs 19,500 crore in total.

Expenditure on Welfare schemes.

Union Minister for Petroleum & Natural Gas and Steel Dharmendra Pradhan on June 13, 2021 said in Parliament that fuel prices cannot be brought down because the government is saving money to spend on welfare schemes.

"I accept that current fuel prices are problematic for people but be it central/state government, over Rs 35,000 crore have been spent on vaccines in a year. In such dire times, we're saving money to spend on welfare schemes.

Prime Minister Narendra Modi approved ₹1 lakh crore under Pradhan Mantri Garib Kalyan Yojana scheme to give free food grain to the poor for eight months.

Under PM-Kisan, thousands of crores have been directly deposited in the bank accounts of our farmers. The MSP was hiked recently. And all this is happening in the current year," said Pradhan (this was in FY 21-22).

Higher Returns 

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.

So to sum up, repayment of Principal and Interest on Oil Bonds raised by the past Govt are not the only reason for the high fuel prices.

Every govt in the country, since independence has used fuel pricing as a tool to offset revenue losses elsewhere incurred due to subsidies or other development activities. This Govt is no exception.

@ Dayanand Nene

(With media inputs )