Oil Bonds- UPSC Current Affairs

Why in the News?

Recently, 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 government.

Image Source: Reuters

Probable Question 

Examine the significance of oil bonds in checkmating the rising fuel prices.     

Key Points

About Oil Bonds

• Oil bonds are issued by the government to compensate Oil Marketing Companies (OMCs) to offset losses that they suffer to shield consumers from rising crude prices.
• These bonds do not qualify as statutory liquidity ratio securities, making them less liquid when compared to other government securities.

Why were these Bonds issued?

• These bonds were issued to OMCs by India between 2005 and 2010 in lieu of cash at a time when the government used to fix fuel prices.
• Previously, 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.
• High crude prices and the blowback from the 2008 recession increased the pressure on the government. By raising capital through bonds, these payments could be made in a deferred manner without causing a major escalation in prices.
• These bonds are, in essence, promissory notes of deferred payment of subsidies that the government owes to OMCs. 
• Since the government did not subsidise these companies, these payouts did not show up in budget documents, until the repayment of the principal or interest components took place.

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How does the Issuance of Oil Bonds check fuel prices?

• 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.

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