Budget may see higher allocation for repayment of G-Secs, oil bonds

Budget may see higher allocation for repayment of G-Secs, oil bonds

Subject : Economy

Section: Fiscal policy

Concept :

• Union Budget for FY24 will see the beginning of the requirement for a higher amount towards repayment of government securities till FY32.
• Still, the expectation is that the gross borrowing might not see a very high increase and could be around ₹16 lakh crore as against an estimated ₹14.21 lakh crore during FY23.
• One reason for not very high borrowing is expected good tax collection
• Government data shows, G-Sec alone worth over ₹4.48 lakh crore maturing in FY24, which will come down a bit to ₹4.10 lakh crore in FY25 but will rise to over ₹5.50 lakh crore and ₹6.76 lakh crore in FY26 and FY27, respectively.

Government Security (G-Sec):

• It is a tradeable instrument issued by the Central Government or the State Governments.
• It acknowledges the Government’s debt obligation.
• Such securities are short term -usually called treasury bills, with original maturities of less than one year or long term-usually called Government bonds or dated securities with original maturity of one year or more).
• In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
• The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry / depository of G-Secs and deals with the issue, interest payment and repayment of principal at maturity.
• Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to statutory hold G-Secs.

Oil bonds:

Previously, Petrol and diesel prices were fixed by the government to cushion consumers from price shocks and if crude oil prices were high, oil refining and marketing companies would technically sell petrol and diesel at retail outlets at a loss. The government, however, compensated oil companies by issuing long-term bonds that they could redeem later. Thus, these bonds are, in essence, promissory notes of deferred payment of subsidies that the government owes to OMCs.

An oil bond is an IOU, or a promissory note issued by the government to the Oil Marketing Companies (OMCs), in lieu of cash the government would have given them so that these companies don’t charge the public the full price of fuel.

There are two components of oil bonds that need to be paid off:

• the annual interest payment, and
• the final payment at the end of the bond’s tenure.

By issuing such bonds, a government can defer the full payment by 5 or 10 or 20 years, and in the interim just pay the interest costs.

For example- An oil bond says the government will pay the oil marketing company the sum of, say, Rs 1,000 crore in 10 years. And to compensate the OMC for not having this money straight away, the government will pay it, say, 8% (or Rs 80 crore) each year until the bond matures.

Purpose:

Thus, by issuing such oil bonds, the government of the day is able to protect/ subsidise the consumers without either ruining the profitability of the OMC or running a huge budget deficit itself.

Conclusion:

Issuing bonds pushes the liability on the future generation. But to a great extent, most of the government’s borrowing is in the form of bonds. However some measures should be taken while issuing bonds:

• The fiscal deficit (which is essentially the level of government’s borrowing from the market) should be  keenly tracked
• The main wisdom while issuing bonds is for a government to employ this tool towards increasing the productive capacity of the economy.