The Centre has argued that it cannot reduce taxes on petrol and diesel as it has to bear the burden of payments in lieu of oil bonds issued by the previous UPA government to subsidise fuel prices.
Oil Bonds
Oil bonds are issued by the government to compensate oil marketing companies (OMCs) to offset losses that they suffer to shield consumers from rising crude oil prices.
Reasons for issuing Oil Bonds
These bonds were issued to OMCs in lieu of cash at a time when the central government used to administer or fix petrol and diesel prices.
Petrol and diesel prices were fixed by the government to cushion consumers from price shocks of costly international crude oil.
Previously, if crude oil prices were high, oil refining and marketing companies would technically sell petrol and diesel at retail outlets at a loss.
So, the government compensated oil companies by issuing long-term bonds that they could redeem at a later date, typically ranging 15-20 years.
By raising capital through bonds, these payments could be made in a deferred manner without causing a major escalation in prices.
Concern for Current Government
These ‘off-budget’ items, also sometimes described as under-recoveries of oil companies, therefore they are not included in the fiscal deficit numbers in the budget.
Moreover, oil bonds do not qualify as statutory liquidity ratio (SLR) securities, making them less liquid when compared to other government securities.
Till now, the government has paid Rs 70,195.72 crore as interest on oil bonds in the last seven years. Of the Rs 1.34 lakh crore worth of oil bonds, Rs 3,500 crore principal has been paid and the remaining Rs 1.3 lakh crore is due for repayment until 2025-26.
