BS Number Wise: The name's bond, oil bond!

The occurrence of two full moons within the same calendar month is rare. We colloquially call it “blue moon”. Somewhat similarly, the legacy of yesteryears’ oil bonds springs up from the dungeon of collective neglect every few years, or once in a blue moon.

In 2018, it was petroleum minister Dharmendra Pradhan who mentioned them. This time, it was Finance Minister Nirmala Sitharaman pointing to them while explaining to journalists why her government was holding on to exorbitant tax rates on petrol and diesel.

Sitharaman said the government was compelled to do so, partly to service the interest and principal on oil bonds raised a decade ago. These bonds had been floated by the previous government to repair the cash flows of beleaguered oil companies as crude oil prices zoomed in the commodity boom of 2000s.

Truly enough, the interest on these “special securities issued to oil marketing companies” is chipping away close to Rs 10,000 crore every year since 2011-12. But it isn’t as simple as it sounds. To understand it better, I attempted to create a simple timeline of these bonds, using data available in public documents.

While the bonds were floated probably in the period between 2004 and 2012, interest payment that began right from their inception is scheduled to continue till 2025. The principal repayment calendar will also go on till 2025-26.

Current governments, it turns out, do pay for the actions of the previous ones!

But did you notice that the time series on x-axis in the chart above is longer than necessary? There is a reason for that.

Just as the bonds floated by the previous government is hurting the finances of the present one, another set of bonds, which the current government floated earlier, will sooner or later impinge on the spending ability of future governments.

I am talking about the bonds floated to recapitalise public-sector banks (PSBs). As finance minister, the late Arun Jaitley had introduced bonds as a means to infuse capital into another set of beleaguered state-owned companies – PSBs.

At more than Rs 2.5 trillion, the principal amount in the case of PSB recapitalisation bonds is way higher than what had been raised in lieu of oil bonds. The government is paying Rs 19,000 crore annually to service the interest on these bonds — nearly twice as much as it is paying on oil bonds — and it will continue to pay this amount or lower for about a decade. The principal has to be repaid by, wait for it, 2034!

Clearly, future governments will have to pay for the actions of the current one. That completes a circle, doesn’t it?

If it was higher oil prices that compelled the United Progressive Alliance government (UPA) to resort to bonds, it was reckless lending by PSBs – and the defaults it led to – that compelled the current National Democratic Alliance (NDA) government to also resort to bonds.

In both cases, the reason for floating bonds was lack of enough cash to allocate from the Budget. And, in both cases, it was left to future governments to bear the interest burden.

Coming back to oil bonds and their legacy, the Rs 10,000 crore shelled out annually is certainly not a small amount. For perspective, this much would be enough to cover direct cash support to 16 million farmers under the welfare framework of the present government.

But it is definitely smaller compared to the cumulative incremental gains made by the central government each year from hikes in fuel excise duties. 

Also, if this payment is the reason for keeping fuel taxes elevated now, it follows that the government would have had no room to cut duties in the recent past, either: The interest burden has been there since 2012.

But, the Centre did lower taxes, not once, but twice in six years.

In October 2017 – and again in October 2018 – excise duties on petrol were graciously cut by a cumulatively Rs 3.5 per litre in order to give consumers some relief amid rising global crude oil prices. Incidentally, the first cut had come a little before the Gujarat Assembly election, and the second in close proximity to state elections in Rajasthan, Madhya Pradesh and Chhattisgarh.

Both the Centre and states have, and especially the former has, made a bounty from revenues on the very fuels underlying these bonds: petrol and diesel.

And it has been the central government that has claimed most of that bounty, by calling a bigger proportion of the fuel tax “cess,” year after year. The Centre’s revenues from these two fuels (after discounting for states’ share) has risen from an estimated Rs 1.4 trillion in 2015-16 to Rs 3.6 trillion in 2020-21.

Under the priciness of the petrol we buy, there is this complex world of revenues, marketing margins, bonds and interest payments. The universe of consumers’ demand, on the other hand, is not as complex. All they demand is cheaper fuel!

Do you still think the government will, especially after giving reasons for high fuel taxes, bite the bullet and cut excise duties? I think the Noes have it! 


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