Oil Bonds

The Centre has maintained that it cannot lower diesel and petrol tariffs because it must absorb the cost of repayments in substitution of oil bonds India are issued by the former UPA administration to subsidize fuel prices.

Here are some facts about the oil bonds UPSC to help you with your IAS Preparation.

Why in news?

The Finance Minister reportedly highlighted that the expense of servicing ‘oil bonds’ imposed by the former UPA government had placed an undue strain on the Centre.

As a result, the union government is unable to lower excise tax as well as other Central taxes on petroleum commodities in order to ease consumer burdens.

In the fiscal year 2020-21, the government is expected to have earned something beyond Rs 3 lakh crore in petrol and diesel taxes.

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What exactly are Oil Bonds?

  • As we all know, the oil market is very volatile and changes within a blink of an eye. The government realizes this and has taken steps to ease their burden by simply issuing bonds to oil companies that are backed by the petroleum ministry.
  • These bonds are often issued in exchange for the cash subsidy for a lengthy period of time, such as 15-20 years, and interest is paid to oil firms.
  • Prior to the total deregulation of petrol and diesel pricing, oil marketing businesses experienced a significant financial hardship due to the fact that in India the retailing price of petrol and diesel was cheaper than the worldwide market price.
  • This ‘under-recovery’ is often addressed with Union budgeted fuel subsidies.
  • Meanwhile, from 2005 to 2010, the previous UPA government offers oil bonds worth Rs 1.4 lakh crore to the OMCs- oil marketing companies to reimburse them for their losses.
    • Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation were among the companies involved.
  • The oil bonds India were issued for two reasons:
    • to lessen the annual fiscal load
    • to stretch the liabilities over a longer period of time.

What is the purpose of such government-issued oil bonds?

Oil marketing companies(OMCs) are often compensated through the purchase of such bonds when the central government is attempting to push the budgetary strain of such payments to future years.

Governments use these tools when they are at risk of exceeding their fiscal deficit objective owing to unanticipated circumstances that result in a drop in income or an increase in spending.

These Oil Bonds are classified as ‘below the line’ expenditures in the Union Budget, and though they do not affect the fiscal deficit for that year, they do raise the government’s overall debt.

Loan interest repayments and bond repayments, on the other hand, will be factored into future fiscal deficit computations.

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What is the history of fuel deregulation policies?

  • The central government gradually deregulated fuel pricing:

Dropping rates for-

1. Aviation turbine fuel in 2002

2. Gasoline in 2010

3. Diesel in 2014

  • Previously, the government would interfere in determining the price at which dealers would supply diesel or petrol.
  • As a result, oil marketing companies (OMCs) suffered under-recoveries, that the central government had to make up for.
  • Rates were deregulated in order to implement them market-linked, relieve the government of the responsibility of subsidising prices, and help buyers to profit from reduced prices whenever global oil prices fall.
  • Price deregulation effectively allows fuel merchants to set their own pricing based on their own cost and profit assessments.
  • The government, on the other hand, stands to benefit the most from this reform of price control.

Impact

  • While the deregulation of oil prices was supposed to be tied to global crude oil prices, Indian customers have not profited from reduced international costs.
  • To collect more revenue, both the union and state governments levy new taxes and levies.
  • This requires the Indian customer to pay either the same amount as before or even more.

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Frequently Asked Questions on Oil Bonds

What is oil bond?

Oil bonds are mandated by the central government to pay oil marketing companies (OMCs) for losses they incur as a result of protecting customers from increased crude prices.

What are under-recoveries?

Revenues forfeited by state-run companies for supplying fuel below cost are referred to as recoveries. It’s what kept the price of diesel and petrol relatively low.

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