The Oil Bond Math

Finance Minister Nirmala Sitharaman recently stated that if she did not have the burden to service oil bonds, she would have been able to reduce excise duty on fuel. The minister blamed the UPA government for the unprecedented spike in oil prices. What is the real truth behind her statement?

- Shivanand Pandit

THE excruciating burden of high fuel prices on the common man continues unabated. The price of petrol and diesel has reached a record high in many cities of India. And the government has simply put the onus on the UPA dispensation. Union Finance Minister Nirmala Sitharaman mentioned recently that she would not be able to slash excise duties on the prices of petrol and diesel anytime soon, while quoting the load of UPA-era oil bonds. She declared that the government was bearing the liability of payments, in lieu of oil bonds issued by the UPA government to subsidise fuel prices, and a substantial amount of money was going into interest payment and settlement of the principal amount.

In India, the cost of a litre of petrol or diesel has three elements—the base price of the fuel, the excise duty imposed by the Union government, a dealer’s commission, and the VAT imposed by states. VAT is one of the only source of income for states as it doesn’t fall into the ambit of GST and doesn’t go into the Consolidated Fund of India.

Like other debt bonds, oil bonds are debt instruments issued to investors or lenders when the government, or a corporate entity, borrows money for a specified tenure of time at a fixed interest rate. Basically, bonds are securities offered by borrowers to lenders comprising particulars of any loan obtained and an assurance to repay them. Precisely, oil bonds are unique kinds of bonds that are issued to Oil Marketing Companies (OMCs), namely IndianOil, Hindustan Petroleum and Bharat Petroleum. These entities have received oil bonds from the government in lieu of cash grants.