Rs 1.3 lakh crore oil bond burden limits scope for tax cut
The Atal Bihari Vajpayee government had ended subsidy on petrol and diesel in April 2002. But the UPA brought back the subsidy regime to keep pump prices artificially low under pressure from coalition partners, particularly the Left parties.
The subsidy regime was implemented through a three-way burden-sharing mechanism. Under this scheme, the government bore one-third of the under-recovery on fuels through subsidy and the remaining part was split among state-run oil refiners such as IndianOil and BPCL and upstream companies such as ONGC.
The UPA government finally freed up petrol pricing in June 2010 but continued the subsidy on diesel. As the subsidy bill continued to swell, it decided on a ‘graded’ increase to wipe out the gap between cost and market price.
ONGC and Oil India Ltd had for more than 13 years paid as much as 40% of the under-recoveries arising from fuel retailers selling petrol, diesel, domestic LPG and kerosene at a government-mandated price, which was way below cost.
A part of the subsidy liability was shifted for future by issuing oil bonds of over Rs 1.4 lakh crore, a part of which will mature in 2021 and continue through 2026. Of the total bonds, only three tranches adding up to Rs 11,500 crore have matured till 2015. Government sources said the bonds entail huge annual interest payout as the papers were issued at an average 8% interest rate.
The Modi administration has been under pressure to lower excise duty on petrol and diesel to arrest runaway retail prices. On Thursday, petrol touched a record high of Rs 81 a litre and diesel soared to 73.08 a litre in Delhi, the benchmark market where state taxes are among the lowest in the country.
(This article was originally published in The Times of India)