Oil Bonds- UPSC Current Affairs

oil bonds prepladder

It’s time to upgrade your UPSC exam preparation with our daily edition of Current Affairs Dialog box. Today we will talk about a very important topic from the CSE point of view, Oil Bonds. Read the blog to understand the topic in detail and its relevance to UPSC CSE syllabus.

For Prelims: Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc

For Mains: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

In case you missed yesterday’s edition of the Current Affairs Dialog box, click here.

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.

 OIL BONDS - INDIAN OIL

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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