Who’s Tricked Whom?

Being short of funds during 2005-2010, the government did not pay the cash subsidy to the OMCs, but instead gave them oil bonds aggregating to about Rs. 1.3 lakh cr.

Finance Minister Smt. Nirmala Sitharaman made some serious allegations against the Congress led erstwhile UPA government last week. While expressing the government’s inability to reduce taxes/duties and the price of fuels like petrol and diesel, she told reporters that the government of Prime Minister Shri Narendra Modi, is today paying for the oil price reduction done by the UPA in 2012-13. Look at their trickery she said, noting that the previous government had cut taxes on fuels, but left the current government with oil bonds. We do not do so many tricks like the UPA government. They issued oil bonds, for which the principal amount is over Rs. 1 lakh cr and for the last seven fiscals, the government has been paying over Rs. 9000 cr. interest annually…. If I did not have the burden to service the oil bonds, I would have been in a position to reduce the excise duty on fuel. She said that the UPA took credit for keeping the prices of fuels low. But today the government is paying through the nose, for the trickery that the UPA indulged in. The use of the word trickery is serious and challenges the very integrity of the government that issued the bonds. Let us therefore examine the alleged trickery of issuance of bonds by the government and see for ourselves, who’s tricked whom.

It was during the period of 2005-2008, that international oil prices hit a high of $ 147 a barrel. At that time, unlike now, prices of petrol, diesel, gas had not been deregulated and were subsidised by the government. To prevent the build up of inflation that burdens the common man, fuel was then sold at below the cost price of the oil marketing companies, with the resultant loss being subsidised by the government, through cash subsidies, funded by the budget. Being short of funds during 2005-2010, the government did not pay the cash subsidy to the OMCs, but instead gave them oil bonds aggregating to about Rs. 1.3 lakh cr., bearing interest rate of upto 8.4% and with a repayment tenure of 15-20 years. While issuance of such bonds is not a prudent and transparent practice, this was however not the first time in India, that the government had done so. Earlier such bonds totalling to Rs. 20000 cr. were issued in 1995, to recapitalise the shaky government banks and oil bonds of Rs. 9000 cr. were also issued in 2002 by the BJP led NDA government, to cover up the deficit in the oil price subsidy.

The issuance of these oil bonds gave relief to the cash starved UPA government, not just by postponing the payment of oil subsidies to the extent of Rs. 1.3 lakh cr., but it also reduced its fiscal deficit to that extent, because the issuance of oil bonds did not amount to expenditure incurred by the government. However, while the issuance of oil bonds postponed the oil subsidy payment of Rs. 1.3 lakh cr., the government now had to pay annual interest of Rs. 9990 cr. on the oil bonds to the OMCs. The UPA government in its second tenure, paid interest of Rs. 53163 cr. on these oil bonds and thereafter the Modi government has paid interest of about Rs. 70000 cr. so far, at about Rs. 10000 p.a., which hardly impacts or aggravates the government’s fiscal deficit, which runs in lakhs of crores per year.

The repayment of the principal amount of these oil bonds begins in the current FY, with Rs. 10000 cr. scheduled to be paid and will continue on an annual basis till FY 2025-26, with Rs. 31150 cr. to be paid in FY 2023-24, Rs. 52860 cr. to be paid in FY 2024-25 and Rs. 36,913 cr. to be paid in FY 2025-26. It is for the excuse to meet this annual interest payment of Rs. 9,990 cr. on the oil bonds, that the government has collected lakhs of crores of rupees since 2015, by sharply increasing the excise duty/cess on petrol/diesel, and refusing to bring it down. The duty which used to be Rs. 9.48 per litre of petrol in 2014, today stands at Rs. 41.90. While the government has paid annual interest Rs. 9990 cr. towards oil bonds, it has thus collected huge amount by way of taxes every year. While such fuel tax collections amounted to Rs. 72,160 cr. in FY 2014-15, they shot up to Rs. 2.73 lakh cr. in FY 2016-17 and to a massive Rs. 4.18 lakh cr. in FY 2020-21, which is far more than what the government needs, to repay/service oil bonds, which is why it has levied such additional taxes/duties on fuel. So the fact is that oil bonds issued by the UPA, have just been an excuse for the Modi government to levy high taxes on petrol/diesel/gas.

Further if the issuance of such bonds is termed as a trickery by the FM, then the Narendra Modi led government too has indulged in it, on a much bigger scale. In order to recapitalise the bankrupt PSBs, the government has issued Recapitalisation Bonds of Rs. 3.1 lakh cr. so far. To do that, surplus public deposits lying with PSBs have been used to subscribe to low interest bearing government bonds and that money has been pumped back into banks by the government as share capital. That ironically amounts to a prohibited practice of giving loans to shareholders to subscribe to share capital. The repayment of these bonds starts from 2028 to 2035 and since the amount of bonds is much more, the government pays to PSBs an annual interest of over Rs. 20000 cr. on them, as against about Rs. 10000 cr. it annually pays on the oil bonds. Incidentally, the issuance of such bonds had the approval of the RBI, MoF and the sychophant bankers of course, who then called it a bold reform and a big bang move, And like in the case of issuance of oil bonds, the bank recapitalisation bonds too helped to window dress and reduce the fiscal deficit of the government, unmindful of the practice and the fact that banks have been compelled to invest public deposits in low interest securities of the government, instead of lending them at much better rates.

The larger picture that emerges from the statement of the FM is that :-

1. The government has collected much much more, than what it needs for the servicing/repayment of oil bonds. In the FY 2021 itself, while it paid interest of Rs. 9,990 cr. on the oil bonds, its collections by way of duty/cess on petrol/diesel was about Rs. 4.18 lakh cr. That negates the FM’s claim that duties on fuel cannot be brought down because of the oil bonds issued by the earlier government.
2. With uncertain and stagnant collections towards direct and indirect taxes, these huge duties on fuels, are an easy and convenient mode for the government to shore up its finances. The government has every right to do so, but let it not be blamed on the oil bonds, since that is not the case, and it is clearly misleading to say so.
3. The fact that even though, such high duties on fuel are fuelling inflation, which is always politically risky, and yet the government refuses to prune them, it shows the desperation of the government, over the weak state of its finances.
4. We consumers are paying for fuel, far in excess of their market prices. While about 52% of the price that we pay for petrol is the actual cost, the rest 58% goes to the government by way of duty and cess. Deregulation of petro products was meant to benefit the consumer, but it has benefitted the government instead.
5. If the present government claims that the issuance of bond is a trickery, then it too is guilty of it on a much bigger scale.
6. The government is in dire need of funds. A transparent response to its fund raising through heavy duties on fuel items, would add to its credibility, instead of blaming the UPA of a trickery, which it too is guilty of.
7. If the government is complaining of the legacy of oil bonds, it is leaving a far bigger one for the government in power between 2028 to 2035 to handle.