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Oil bonds aim to ‘insulate’ customers: Experts see ‘scope for fuel cess cuts’

Congress leader and former Finance Minister P Chidambaram told The Indian Express that Finance Minister Nirmala Sitharaman has presented a “hollow argument” as subsidies were financed through borrowings by the UPA government, and there is scope for the present government to provide relief to consumers.

Written by Sunny Verma | New Delhi |
August 19, 2021 3:25:30 am
Former Finance Minister P Chidambaram

The government’s argument that it cannot reduce taxes on fuel due to the burden of past oil bonds is not convincing and the Centre has the wherewithal to provide relief to consumers from high prices of petrol and diesel, economists said. Congress leader and former Finance Minister P Chidambaram told The Indian Express that Finance Minister Nirmala Sitharaman has presented a “hollow argument” as subsidies were financed through borrowings by the UPA government, and there is scope for the present government to provide relief to consumers.

“What the FM has argued doesn’t make any sense. They have collected more than Rs 15 lakh crore in last five years from taxes (on fuel). This is absolute treachery to say that prices cannot be reduced due to burden of oil bonds. If they do not want to reduce (taxes), they should simply say that we will not reduce,” said a chief economist with a bank who did not want to be named.

Sitharaman said on Monday that “the Government of Prime Minister 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.

Before fuel prices were deregulated, petrol and diesel as well as cooking gas and kerosene were sold at subsidised rates during UPA rule. The then government issued oil bonds totalling Rs 1.34 lakh crores in lieu of subsidy.

Chidambaram said: “The FM’s argument is a hollow argument and betrays colossal ignorance. If she had consulted any economist, she would have understood that the subsidy on fuels (given by the UPA) was financed by borrowing. Whether the government borrowed directly or borrowed through its surrogates (oil companies), the effect is the same. In either case, the interest burden has to be borne by the government. If she has the courage, the FM should say that the subsidy on fuels given by the UPA to lessen the burden on the consumer was not justified at that time. I dare the FM to say that.”

He said government has the scope to provide relief to consumers. “Government’s greed for money has led it to impose huge cesses on petrol and diesel which are cruel and oppressive. There is scope to cut the cesses and give relief to the consumer. Since people are crying for relief, they must be given some relief,” he said

Economists said the oil bonds were issued to insulate consumers.

“In the past when oil prices were over $120 a barrel, the oil bonds were issued to minimise impact on consumers and keep oil marketing companies profitable. If that was not done, the retail prices would have been much higher at that point in time. It would have led to higher inflation, lower disposable income for consumers, affecting consumption and growth. Lower growth in turn would have led to lower tax collections. It is difficult to say, which decision was optimal. But this is how consumers were insulated,” said DK Pant, Chief Economist and Head Public Finance, India Ratings and Research Pvt Ltd.

“What you need to look at the government’s aim is to minimise losses, but the loss minimisation should not be at the cost of welfare loss of general population,” Pant said

The Centre hiked the excise duty on petrol to Rs 32.98 per litre in May 2020 from Rs 19.98 per litre, and on diesel to Rs 31.83 from Rs 15.83.

The Centre’s revenue from taxes on crude oil and petroleum products jumped 45.6 per cent in 2020-21 to Rs 4.18 lakh crore. Excise duty on petroleum products jumped over 74 per cent year-on-year to Rs 3.45 lakh crore in 2020-21, according to government data.

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