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Current Affairs

Oil bonds

Date: 19 August 2021 Tags: Miscellaneous

Issue

The central government has refused to reduce taxes on petrol and diesel citing the obligation to pay oil bonds.

 

Background

The prices of petrol and diesel are all-time high owing to rise in crude oil prices in international market.

 

Details

  • The oil bonds were issued by the finance ministry during the UPA-2 government to subsidize the rising oil prices.

  • During the UPA rule petrol, diesel as well as cooking gas prices were sold at lower rate. Later they were deregulated.

  • The government did not directly pay subsidy cost to oil marketing companies from its budget but rather issued bonds worth 1.34 lakh crore.

  • This was done to prevent fiscal deficit in the budget. The government now has to pay interest on the bonds and is not ready to reduce excise duty.

  • The government now has adopted a similar strategy when it comes to recapitalization of state-owned banks by issuing re-capitalization bonds, which will mature between 2028 and 2035.

 

The government’s argument

  • The government says that it has an obligation to pay Rs 9,000 crore annually as interest on the oil bonds, making it impossible to reduce taxes on fuel.

  • It has accused the previous regime of burdening the centre with oil bonds. The government has expressed helplessness.

 

Deregulation

  • The deregulation of fuel was carried out step by step. Firstly, the aviation fuel was deregularised followed by petrol and later diesel.

  • Earlier the government would decide the rates for selling fuels and oil marketing companies were under losses for selling below recovery cost.

  • The deregularisation allowed government to avoid subsidy burden, made oil companies profitable and gave user price benefits when global oil prices fell.