Govt makes largest-ever payment for slashing oil bond dues

Total interest outgo to top Rs 1.6 trn, against bonds of Rs 1.44 trn since FY10

The Centre’s tax collections this year have come in handy for making roughly Rs 20,000-crore payments against oil bond dues and interest. This will lower the Centre’s interest outgo on oil bonds over the coming years and is the largest payment that has been made to date in any fiscal year for this purpose.

The worrying part, however, is that these bonds were issued when interest rates were high. According to information gathered through a right to information (RTI) application, the interest rate on these bonds range between 6.35 per cent and 8.4 per cent. 

The Centre’s collections from excise duty, however, are well in excess of what it has to pay out for the bonds. It got Rs 72,360.79 crore during the first three months of the current fiscal. Excise duty collections in 2020-21 were at Rs 3.72 trillion — the highest since 2014-15 (FY15). Although 41 per cent of the excise duty collection goes to states as part of the statutory Centre-state revenue-sharing, the Union government is still left with an amount higher than its outgo on oil bonds.

According to the status paper on government debt (2018-19), liabilities on account of these special securities had increased significantly between 2005-06 and 2008-09. The high debt was driven by the United Progressive Alliance government opting to keep fuel prices lower in the country, but at the cost of passing on the subsidy burden to a later date.

These oil bonds have become a political hot potato, with the Bharatiya Janata Party-led National Democratic Alliance government citing them as reason for high taxation on automotive (auto) fuels.

This has been a line that multiple ministers of the ruling government have reiterated. In August this year, Finance Minister Nirmala Sitharaman called these bonds a ‘trickery’ of the previous regime. Later in September, Petroleum Minister Hardeep Singh Puri cited these outstanding payments as reason for maintaining taxation levels, that were then in excess of 50 per cent (when taking both the Centre and state levies together), on petrol and diesel.

With prices in excess of Rs 100 per litre on both petrol and diesel in some states, the clamour for lowering levies finally forced the Centre to relent. On November 4, excise duty on petrol was cut by Rs 5 to Rs 27.9 per litre; on diesel it was brought down by Rs 10 to Rs 21.8 per litre. This was followed by most states lowering the value-added tax on auto fuels to tame inflationary forces that were building as global crude oil prices were rising.

According to the RTI response to Business Standard, oil bonds amounting to Rs 1.3 trillion were outstanding till March 31. This amount has been trimmed in two tranches of Rs 5,000 each paid on October 16 and November 28 this year, bringing down the outstanding amount to Rs 1.2 trillion. The next payment of Rs 31,150 crore towards slashing oil bond debt is now going to be made on November 10, 2023. It will be topped with an interest outgo of Rs 9,195.96 crore, taking the total outgo in 2024-25 (FY25) to Rs 40,345.96 crore.

The current Rs 10,000-crore payout is the first payment made towards bringing down oil bond dues since FY15, when Rs 3,500 crore was discharged by the Centre, lowering the outstanding from Rs 1.34 trillion.

While the outstanding oil bond amount was largely unchanged, the Centre had been bearing interest costs annually. Between 2009-10 and 2025-26 (FY26), Rs 1.6 trillion will be spent as interest cost against an initial debt of Rs 1.44 trillion. 

These annually accrued interest of Rs 10,255.96 crore in 2013-14 and FY15. Interest accrued stood at Rs 10,457.66 crore in 2012-13, and Rs 10,957.56 crore in 2010-11 and 2011-12. (see chart)