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Current Affairs

Oil bonds

Date: 19 April 2022 Tags: Basics of Economics

Issue

The government has blamed oil bonds for the high taxes on petroleum products that have resulted in high retail prices.

 

Background

The oil bonds were introduced during the UPA era when the government in power wanted to subsidize the prices through borrowing.

 

Details

The retail fuel prices in India depend on two factors: the cost of crude oil, refining charges and taxes imposed on the commodity.

The Finance Minister has blamed Ukraine conflict and oil bonds for the current high prices felt by the customers.

Ukraine conflict has increased the cost of crude oil and oil bonds have forced the government to impose high taxes.

The ministers claim that today’s generation is paying for the subsidy that was given a decade back and this process will continue till 2026.

 

Oil bonds

Oil bonds are promissory notes that the government will pay to Oil Marketing Companies (OMCs) for keeping the prices unchanged.

The government in the past promised companies to pay Rs 1,000 crore in 10 years in one such bond. Until the bond matures, the government will pay certain amount each year.

In this way, the government ensured that public did not carry the burden of price rise and neither did OMCs suffer from unprofitable returns due to subsidies.

 

Criticism of oil bonds

Prime Minister Dr Manmohan Singh had agreed that issuing oil bonds was a way of shifting liability to the future generation.

This move would have given temporary respite but not improve state of economy. Future governments would have to abide by the commitments made by previous government.

 

Promissory note

A promissory note is a financial tool used by a party, promising another party to pay the debt on a particular day.

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.