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There is a considerable unease among the public regarding the skyrocketing fuel prices across the country. In many cities and towns across India, there have been reports that price of Petrol have breached Rs 100 and that of diesel hovering around Rs 90-100 in the past few weeks. The popular argument however is, despite a fall in international crude oil prices, there has been no commensurate reduction in the prices of fuel in the domestic market, thereby forcing the consumers to shell out more from their pockets amid a deadly pandemic which has crippled the economy and has put enormous financial burden on the citizens. Opposition parties and a section of intellectuals have slammed the BJP government at the Centre for failing to pass on the benefits to the customers in the retail market given the fact that prices at international crude oil market has depreciated significantly.

But what if we tell you a different story behind the current spike in the fuel prices? According to a leading English daily, The Hindu Business Line, the Modi government is all set to redeem Rs 1.30 lakh crore UPA era oil bonds to public sector oil companies in lieu of the subsidies borne by them. A Principal Installment of Rs 10,000 crore will come up for repayment this fiscal year, the first since 2015.
What are oil bonds? Oil bonds are issued by the government to compensate oil marketing companies (OMCs), fertiliser companies and the Food Corporation of India (FCI) for losses borne by them in the process of regulating prices. They are similar to government securities. These usually have a long maturity period extending over 15-20 years. Interest payments will be due at fixed intervals during the tenure of the bond. These debts are not accounted in the fiscal deficit number of the issuing year. Unlike cash subsidies, there is no direct cash flow. These Oil Bonds are less liquid as compared to other government securities as these bonds do not qualify as Statutory Liquidity Ratio(SLR). Oil bonds can be traded for liquid cash by sale in the secondary market to insurance companies, banks, and other financial institutions.

The then Congress led UPA government took to oil bonds rather than subsidies as an alternative to regulate the fuel prices between 2005- 2009. Dramatic surge in crude oil prices coupled with the shock of 2008 Global Financial Crisis were cited as reasons behind this move as the government thought to make payments to the OMCs in a staggered manner through the capital raised through these bonds and simultaneously shield the customers from the unprecedented escalation in prices of fuel and thus save itself from a political backlash. According to reports, between 2005 and 2009, the government issued bonds worth Rs 1.4 lakh crore. This was done to partially compensate OMCs for recoveries amounting to Rs 2.9 lakh crore. Under-recoveries are the difference between the cost of purchasing crude oil in the international market and the price at which petroleum products are sold in the domestic market. In the aftermath of recessions, oil companies were facing financial crisis and since most of the OMCs are state owned, the government decided to salvage the burden of these companies through the mechanism of oil bonds. But this strategy was not only ill conceived but was also ill advised.

It is simply a clever political tool to cushion the consumers from market volatilities for a short term without any tangible benefits in the long run. Hence, resort to petro bonds is neither economically sound nor fiscally prudent. It simply prolongs the burden of financing subsidies. Thus, this experiment raises some very pertinent questions like why the UPA government
which was headed by an economist turned politician thought of a policy like oil bonds. Obviously, the purse strings of the then Union Government were much stronger, thanks to the path breaking economic reforms and resultant economic boom experienced during their predecessor, Atal Bihari Vajpayee led NDA government. The government could have directly subsidized the OMCs from its own exchequer since fiscally expansionist policies were continuing as usual like MGNREGA and various other subsidies. Economists argue that the government could have exercised an alternative yet rational policy option to deal with this quagmire. The economic consequences of petro bonds are not very similar to the obvious alternative of transparent cash subsidies from government to OMCs. In the latter case, government savings would fall (widening revenue deficit) and government borrowing requirements would increase (because of a higher fiscal deficit), with attendant upward pressures on interest rates and “crowding out” of private investment. In the oil bond case the OMCs take the hit in their profits, leading to lower taxes, lower retained earnings and lower distributed profits (to government), thus reducing public savings in all three ways. Very soon the government will find itself squeezed between the quandary of having to raise prices and the hard place of rationing/queues/black markets.

These oil bonds are more of politics than economics. It is like passing on the burden of repayment on a person for a loan that he has not taken at all. The redemption of bonds will continue till 2026 which means penalizing the tax payers of today for subsidies doled out to the consumers more than a decade ago. Its perplexing how a so called ‘highly qualified economist PM credited with 1991 LPG reforms’ held at high esteem by his peers, many left inclined economists, public intellectuals, thought leaders agreed for such a scheme which perpetuates nothing but misery and inflationary trends in the long run. It is also ironical that Dr Manmohan Singh had in 2008 remarked that issuing debts and loading deficits on companies is not a permanent solution and ‘’we are only passing on the burden to our children’’ who will have to repay this debt. In 2012, the very same Prime Minister retorted that subsidy on petroleum products has grown enormously and wondered where will the money come from?

A rather arrogant reply from this supposed man of wisdom was ‘’money doesn’t grow on trees’’. Perhaps he vented out his frustration due to the stagflation in the economy prevalent then, the eroding legitimacy of his government rocked by scams and policy paralysis and the fear of an imminent electoral defeat which came true in 2014.

Modi government got these oil bonds in addition to innumerable other disastrous and moribund economic instruments as legacy from the UPA 1 and UPA 2 governments. The present government is left with little option other than repaying for these bonds. Congress led UPA remained a template of crony capitalism, neo liberalism, corruption and scams where concentration of power remained in the hands of Gandhi family with little space for saner voices to prevail over policy making. Will the Congress party and its allies who are part of UPA answer why did they resort to such blatantly unsustainable policies which is haunting honest tax paying Indians even today? Why did the Congress party which claims itself to be pro socialist, pro working class and representative of weaker and marginalized sections compromised on the welfare of public to serve few vested interests within and outside the government?


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