The central government, facing public ire for the rising fuel prices, has blamed the previous United Progressive Alliance (UPA) government for the situation and expressed its helplessness in reducing taxes on fuel. Petrol and diesel prices have shot through the roof this year, impacting the household budget of citizens already reeling from the economic devastation caused by the COVID-19 pandemic.
At a Finance Ministry briefing, Nirmala Sitharaman said, “They [the UPA] took credit for keeping the prices of fuels low. But today, the government is paying through the nose for the trickery the UPA indulged in. I can’t provide any relief due to the oil bonds worth ₹1.44 lakh crore issued in 2012 by the UPA.” She added that the government has paid ₹70,195 crore as interest on these bonds.
What Are Oil Bonds?
Before the fuel prices were deregulated, public sector oil marketing companies (OMCs) used to sell petrol/diesel at below-market prices incurring what is called “under-recoveries”. These were compensated by the government through the issuance of oil bonds. OMCs subscribed to these bonds having tenures of 15-20 years and earned interest annually.
The UPA government issued ₹1.44 lakh crore of such bonds in the aggregate. It helped the government defer expenditure on subsidies and manage the fiscal deficit as these bonds were not shown as borrowings in the budget (something like off-balance-sheet financing).
Petrol prices were deregulated in 2010 and diesel in 2014, enabling OMCs to sell fuel at market prices at pumps. OMCs have not been incurring any under-recoveries since then and the issuance of such bonds have been discontinued.
FM Is Partly Right. But What About Tax Hikes?
The Finance Minister is partly right in saying that the BJP government is carrying the burden created by the UPA government. However, the National Democratic Alliance (NDA) government has increased the excise duty on petrol and diesel many times during its tenure.
The government currently levies ₹32.90 per litre excise duty on petrol ( + ₹23.3/litre) and ₹31.80 a liter on diesel (+ ₹28/litre). The hike has been so steep that the contribution of petrol and diesel to excise duty collection from fuels has increased from 73% in 2014-15 to 95% in 2020-21.
The excise duty collections on fuels have almost quadrupled from ₹99,000 crore in 2014-15 to ₹3.71 lakh crore in 2020-21. The excise duty collected on fuels during the last seven years of the NDA rule is ₹15.6 lakh crore, more than 12 times the bonds outstanding. These could easily have been used to retire/repay the UPA bond burden.
For all of the seven years, except the first (2014-15), the excise duty collections have been more than the principal and interest outstanding on oil bonds. Just one year of excise duty collection is more than sufficient to pay off the entire oil bonds.
Worth Five Times the Oil Bonds
The excise duty collections have increased not only due to a hike in rates but also due to an increase in consumption. The demand for petrol and diesel has increased by an average of 6% from 2014-15 to 2018-19. In 2019-20, the growth was just 1%, while in the pandemic year 2020-21, the demand declined by 11%.
The total excise duty collection would have been ₹8.1 lakh crore in the last seven years if the NDA had not increased the excise duty. This means that the NDA government received an additional ₹7.5 lakh crore by levying higher duties, which is five times the principal and interest outstanding on oil bonds of ₹1.44 lakh crore.
There are four components associated with fuel prices — international crude oil prices, central taxes (Excise Duty), state taxes (Value Added Tax), and dealer’s margin.
International prices are not within the control of the government.
Since pump prices are deregulated, it can’t ask OMCs to reduce prices. This will again lead to under recoveries and start the vicious cycle of oil bonds.
State taxes are not in its jurisdiction (recently Tamil Nadu reduced taxes by ₹3/litre).
Dealer margins are a small fraction of the total price.
The break-up of excise duty for petrol and diesel reveals that more than 60% is infrastructure cess. The government is using a majority portion of taxes on fuel to fund infrastructure projects. Modi 2.0 has announced an ambitious ₹100 lakh crore Gati Shakti plan to create long-term assets that will generate employment and fuel growth.
(Note: Cess is a form of tax charged/levied over and above the base tax liability of taxpayers. A cess is imposed when the state or the central government looks to raise funds for specific purposes.)
‘Fuel Nationalism’ Is the Real Reason
It will be much better if the Modi government comes out and explains to the people the rationale for high fuel prices instead of engaging in political rhetoric. It should convey to the people that the nation is facing an acute economic crisis post the pandemic. In such a scenario, the Centre is not in a position to reduce fuel prices. High prices should be construed by people as their contribution to nation-building. People would rather believe this theory than seeing the NDA blaming the UPA for all its ills.
Or, it must look for alternatives.
Consistent high fuel prices have pushed up inflation in the economy. It has a cascading effect on the cost of everything — from food to steel, cement and fertilizers — through increased cost of logistics for transportation. The Reserve Bank of India (RBI) also recently called for a reduction in taxes on petrol and diesel by central and state governments, citing rising inflationary pressures.
The government can raise a similar amount of money by imposing an infrastructure cess on income tax, which will spare the poor from the rising price scenario. Price rise is the biggest failure of the Modi government according to the findings of the latest Mood of the Nation Survey by India Today.
The Modi government needs to act fast.
(The author is an independent political commentator and can be reached at @politicalbaaba. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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