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.
Before fuel prices were deregulated, petrol and diesel as well as cooking gas and kerosene were sold at subsidised rates during UPA rule.
Instead of paying direct subsidy to oil marketing companies from the Budget, the then government issued oil bonds totalling Rs 1.34 lakh crore to the state-fuel retailers in a bid to contain the fiscal deficit. Citing the need to repay interest and principal components on these bonds, the Centre has now argued that it needs higher excise duty to help its finances.
The NDA government too has used a similar strategy to inject capital into state-owned banks and other institutions by issuing recapitalisation bonds worth Rs 3.1 lakh crore, which will come up for redemption between 2028 and 2035.
What’s the government’s argument?
“Look at their trickery,” she said, noting that the previous government had cut taxes on fuels but left the current government with oil bonds. “We don’t do so many tricks like the UPA government. They issued oil bonds for which the principal amount is over Rs 1 lakh crore, and for the last seven fiscals, the government has been paying over Rs 9,000 crore interest annually… If I did not have the burden to service the oil bonds, I would have been in a position to reduce excise duty on fuel,” she said.
Why were oil prices deregulated, and how has it impacted consumers?
Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of aviation turbine fuel in 2002, petrol in 2010, and diesel in 2014.
Prior to that, the government would intervene in fixing the price at which retailers were to sell diesel or petrol. This led to under-recoveries for oil marketing companies, which the government had to compensate for. The prices were deregulated to make them market-linked, unburden the government from subsidising prices, and allow consumers to benefit from lower rates when global crude oil prices tumble.
While oil price deregulation was meant to be linked to global crude prices, Indian consumers have not benefited from a fall in global prices as the central as well as state governments impose fresh taxes and levies to raise extra revenues. This forces the consumer to either pay what she’s already paying, or even more.
Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices based on calculations of their own cost and profits. However, the key beneficiary in this policy reform of price decontrol is the government.
How much taxes/duties has the government collected?
The Centre’s revenue from taxes on crude oil and petroleum products jumped 45.6% in 2020-21 to Rs 4.18 lakh crore. Excise duty on petroleum products jumped over 74% year-on-year to Rs 3.45 lakh crore in 2020-21, according to government data.
The Centre’s share in taxes on petroleum products has progressively increased from Rs 2.73 lakh crore in 2016-17 to Rs 2.87 lakh crore in 2019-20. On the other hand, the share of states in taxes on crude oil and petroleum products decreased 1.6% to Rs 2.17 lakh crore in 2020-21 from Rs 2.20 lakh crore in 2019-20. (See table)
The Centre and a number of states have significantly increased duties on petrol and diesel as a way to boost revenues in view of the Covid-induced restrictions that curtailed economic activity. State and central levies account for about 55.4% of the retail price of petrol and 50% of the price of diesel in Delhi.
Central levies alone account for about 32.3% of the retail price of petrol and 35.4% of the pump price of diesel in Delhi. 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.
Fuel prices have increased steadily over the last one year. The country has already seen a 21.7% increase in the prices of petrol and diesel since the beginning of the year. Petrol is currently retailing at Rs 101.8 per litre in Delhi and diesel at Rs 89.87 per litre.
The price of petrol has been increased 39 times and decreased once in 2021-22, while that of diesel has been increased 36 times and decreased twice. In 2020-21, the price of petrol was hiked 76 times and decreased 10 times and that of diesel increased 73 times and decreased 24 times.
To what extent have the oil bonds been serviced by the government?
The interest on oil bonds paid in the last seven years totalled Rs 70,195.72 crore. Of the Rs 1.34 lakh crore worth of oil bonds, only Rs 3,500 crore principal has been paid and the remaining Rs 1.3 lakh crore is due for repayment between this fiscal and 2025-26.
The government has to repay Rs 10,000 crore in the current fiscal year, another Rs 31,150 crore in 2023-24, Rs 52,860 crore in 2024-25, and Rs 36,913 crore in 2025-26. But this is less than a tenth of the excise duty on petroleum products at Rs 3.45 lakh crore, a majority of which accrues to the Centre.
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What is the current government’s bond strategy for banks?
In October 2017, then Finance Minister Arun Jaitley had announced that recapitalisation bonds would be issued as a one-time measure to inject equity into PSU banks that were stressed by bad loans. This instrument does not impact the fiscal deficit, with only interest payment being reflected in deficit calculations. Initially, the government had indicated that a total of Rs 1.35 lakh crore worth of recap bonds would be issued, but this later became routine and a convenient practice.
The government so far has issued recapitalisation bonds to public sector banks and EXIM Bank, IDBI Bank and IIFCL worth Rs 3.1 lakh crore, as per Budget documents. Out of this, Rs 5,050 crore is for recapitalisation bonds to EXIM Bank, Rs 4,557 crore to IDBI Bank, Rs 5297.60 crore to IIFCL and Rs 3,876 crore for non-interest bearing bonds to IDBI Bank. Special securities worth Rs 2.91 lakh crore issued to public sector banks would begin to mature beginning 2028.