A major reason for the high price of petrol and diesel is the increase in the excise duty collected per litre by the central government, on petrol and diesel. The justification offered has been that these higher taxes have been used by the central government to pay off oil bonds issued by the previous central government.
I had briefly dealt with this issue in the second piece I wrote on petrol and diesel pricing. Here I go into a little more detail.
Dharmendra Pradhan, the petroleum minister, said this in June 2018: “Having sensed that it was not going to return to power, the earlier government issued oil bonds to the tune of Rs 1.44 lakh crore. This load was handed over to our government. We inherited this huge load and paid additional Rs 70,000 crore as interest.”
In 2014-2015, the excise duty collected from petroleum products stood at Rs 99,184 crore. By 2017-2018, this had jumped to Rs 2,29,019 crore. This is a jump of more than 100 per cent. When Narendra Modi was sworn is as prime minister in May 2014, the price of the Indian basket of crude oil had averaged around $106.85 per barrel, during the course of the month. It fell to a low of $28.1 per barrel, during the course of January 2016.
The Modi government moved in quickly to capture a bulk of this fall in price by raising the excise duty on petrol and diesel. This is why petrol and diesel prices currently are more expensive than they were back in May 2014, even though oil prices are substantially lower.
Basically, what Pradhan is saying is – yes, the Modi government has collected higher taxes on petrol and diesel – but these higher taxes have been used to pay interest on oil bonds and repay maturing oil bonds, issued by the Manmohan Singh government.
First and foremost, let’s understand what oil bonds are. These bonds were issued by the government to the oil companies for the under-recoveries (the difference between the administrative price and the cost) they suffered when selling petrol, diesel, kerosene and domestic cooking gas, below cost. This happened up until 2009-2010.
After that, the oil companies were paid directly from the central government exchequer for any under-recoveries.
In an answer to a question raised in the Lok Sabha, on August 10, 2018, the government said: “As on 31st March 2014, bonds of the nominal value of Rs 1.34 lakh crore were outstanding. Oil bonds to the tune of Rs 1.30 lakh crore were outstanding as on March 31, 2015.”
The questions asked by V Elumalai, a Lok Sabha MP from Tamil Nadu were:
(a) whether the Government has noted that there were Rs 1.30 lakh crore of oil bonds which are unpaid bills of oil companies from 2009-14;
(b) if so, the details thereof;
The interesting thing is that the question was answered on August 10, 2018. Even then, the government chose to share data valid as of March 31, 2015. The latest data wasn’t shared. Why? The answer will be clear by the end of the piece.
Now we have all the information to look at what Pradhan has been saying.
1) First and foremost, the oil bonds were issued up unto 2009-2010. This was four years before the Congress-led UPA government faced the 2014 Lok Sabha elections. Hence, Pradhan’s statement that “Having sensed that it was not going to return to power, the earlier government issued oil bonds to the tune of Rs 1.44 lakh crore,” doesn’t really make any sense.
In March 2010, the Manmohan government couldn’t have been worried that it would be defeated in the May 2014 Lok Sabha election.
In fact, paying the under-recoveries of oil companies directly from the government coffers made much more sense from an accounting point of view, and that’s what was done.
2) Pradhan also said that the Modi government had paid an interest of Rs 70,000 crore on the oil bonds. This would mean that on an average an interest of Rs 17,500 crore per year was paid (Rs 70,000 crore divided by the four years the Modi government has governed the nation). An interest of Rs 17,500 crore has been paid annually on bonds with a nominal value of Rs 1,30,000 crore. This works out to an interest of 13.5 per cent, per annum. Why would the government of India pay such a high interest and on top of that to its own companies, is something that Pradhan should explain.
Further, in a tweet, Pradhan contradicts himself by saying that his government pays Rs 10,000 crore a year as an interest on these bonds. Piyush Goyal said the following in June 2018: “Also, interest paid on oil bonds between 2014-18 is Rs 40,226 crores”. Goyal was also the finance minister of the country when he said this.
This figure makes sense, as it works out to an annual interest paid of around Rs 10,057 crore or an interest rate of 7.7 per cent. This sounds like the kind of interest the government would pay on the bonds that it issues. In fact, the oil bonds which are currently outstanding have a rate of interest varying from 6.35 per cent to 8.4 per cent.
3) Between 2014-2015 and 2017-2018, a total of Rs 7,49,485 crore of excise duty was collected by the government on petroleum products (petrol, diesel and aviation fuel). Of this Rs 40,226 crore was used to pay as interest on oil bonds issued by the Manmohan government.
The other question is what portion of the oil bonds matured in the last four years and have had to be repaid by the government. This is where things get very interesting. We need to take a look at the Statement 2E of the receipt budget of the government of India. (Sneha Alexander writing for Boomlive.in first brought this to light).
Take a look at Figure 1, which is nothing but statement 2E reproduced.
What does Figure 1 tell us? It tells us that in the last four years, only two oil bonds worth Rs 1,750 crore each, matured. This meant that the government repaid Rs 3,500 crore in total. This brought down the total oil bonds outstanding from Rs 1,34,423 crore to Rs 1,30,923 crore. The next maturity is in October 2021.
Given this, what has the oil minister Pradhan been talking about? Other than paying an interest of Rs 40,226 crore, the government has repaid oil bonds worth Rs 3,500 crore. This means a total of Rs 43,726 crore has been spent on repaying oil bonds and paying interest on them.
As mentioned earlier, the total excise duty collected on petroleum products over the last four years has been Rs 7,49,485 crore. Hence, the total money spent on oil bonds is 5.8 per cent of the total excise duty collected on petroleum products (Rs 43,726 divided by Rs 7,49,485 crore).
Yes, you read that right. Just 5.8 per cent.
What is it that Pradhan and others in the Modi government have been trying to tell us? Where has all this money gone then? Where did the remaining amount close to Rs 7,06,00 crore go?
One explanation is the farm loan waivers carried out by all the state governments across the country (BJP as well as non-BJP). As per accepted recommendations of the Fourteenth Finance Commission, the States’ share has been fixed at 42 per cent of the net proceeds of shareable Central Taxes. And do remember that money is fungible.
4) This is a point I made in the second piece, but it is well worth repeating here. The BJP was in Opposition from May 2004 to May 2014. And unlike the Congress now, it was a very effective Opposition party. Haranguing the government constantly on high prices of petroleum products, was part of an effective strategy that the BJP ran for the decade when it was in Opposition.
Hence, to that extent, the BJP also had some role to play in the Congress government deciding to subsidise petroleum products and then deciding to issue oil bonds against it. If it didn’t, that would mean questioning its credibility as an Opposition party.
To conclude, the nation wants to know that when it comes to oil bonds, why have Dharmendra Pradhan and the BJP, been misleading the nation.