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Will the govt scrap oil bonds?

Published on Thu, Aug 02, 2007 at 13:14 | Source : Moneycontrol.com

Updated at Mon, Aug 06, 2007 at 11:45

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According to media reports, the UPA government plans to scrap the practice of issuing bonds to PSU oil marketing companies. It will instead meet its subsidy obligation by providing for it in the Union Budget.

It may be recalled that Committee on Pricing and Taxation of Petroleum Products, headed by Dr C Rangarajan, had in its February 2006 report said that the issuance of oil bonds raises some fiscal concerns.

This fiscal, the government has estimated losses at Rs 52,162 crore on account of sale of fuel at lower-than-market prices by oil marketing companies. The Oil Ministry is also framing a strategy for petroleum product pricing.

The government had finally woken up to the fact that there is a long-term mismatch between domestic retail prices and global oil prices, which is unsustainable without the Centre's intervention. It has also realised that this problem cannot be tackled with the issue of oil bonds.

The Oil Ministry has also proposed an increase in the prices of four fuels. However, that note is pending with the Cabinet for approval.

The government had decided to issue bonds to PSU oil companies to bail them out from certain bankruptcy.

Oil bonds issued so far
Year	Rs crore	Maturity
2005-06	4,000	2009
	4,000	2012
	3,500	2015
2006-07	10,000	2021
	4,150	2023
	5,000	2024
	4,971	2026
	35,621

The Centre might also adopt the committee's recommendations. The panel had proposed a three-pronged package, under which the government could affect a price hike in four products, meet its burden by current provisioning without recourse to oil bonds, and modify the existing LPG and kerosene subsidy scheme to clearly target the poor.

A parallel exercise is also being undertaken to restructure excise duties. In line with the Rangarajan panel's recommendations, the government may shift to a specific levy and calibrate the levies at Rs 5 per litre for diesel and Rs 14.75 per litre for petrol from the present mix of specific and ad-valorem duties.

Every Re 1 per litre increase in the retail price of petrol, diesel, kerosene, and per cylinder of LPG will reduce the annual under-recoveries on petrol by Rs 1,040 crore, diesel by Rs 4,250 crore, kerosene by Rs 1,130 crore and LPG by Rs 690 crore.

According to S P Tulsian of sptulsian.com , one should not read too much into these reports as the budget preparation exercise is far away. "Earlier the government was issuing bonds and now, if the move materializes, it will get charged to the Budget. One must not read too much into this as the budget preparation exercise is far ahead," he added.