- April 18, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Section: Fiscal policy
The Finance Minister has said the government cannot bring down taxes – and thus oil prices – because it has to pay for oil bonds issued by the UPA.
From 2015 to 2021, the government has fully paid off four sets of oil bonds — a total of Rs 13,500 crore. As of March 31, 2021, there was Rs 1.31 trillion in outstanding principal and Rs 37,340 crore in interest yet to be repaid on these oil bonds, she said.
How much of fuel prices is tax?
- There are two components to the domestic retail price — the price of crude oil itself, and the taxes levied on this basic price.
- The taxes vary from one product to another. For instance, as of now, taxes account for 50% of the total retail price for a litre of petrol, and 44% for a litre of diesel.
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.
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.
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.
|Deregulation of Oil prices|
The first step towards deregulation was taken in 2010 with the announcement that oil bonds will be discontinued, and OMCs will be paid in cash.
In June 2010, petrol prices were deregulated, mirroring the market price of crude. The government freed diesel prices in October 2014. In June 2017, India adopted the system of dynamic fuel pricing where the retail price of petrol and diesel fluctuate on a daily basis.
Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing
Gross fiscal deficit = Total expenditure – (Revenue receipts +
Non-debt creating capital receipts)
The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources. From the financing side
Gross fiscal deficit = Net borrowing at home + Borrowing from
RBI + Borrowing from abroad
Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).
From the way gross fiscal deficit is measured as given above, it can be seen that revenue deficit is a part of fiscal deficit
Fiscal Deficit = Revenue Deficit + Capital Expenditure – non-debt creating capital
A large share of revenue deficit in fiscal deficit indicated that a large part of borrowing is being used to meet its consumption expenditure needs rather than investment.