Indian Oil Bond Story

After reading everyday about the rising oil prices in our dailies, I thought of sharing an article, I read recently. This is a short story that actually uncovers the pretence of our finance ministry of being people-friendly and the burden suffered by our oil companies.The story starts with rising crude prices. Now the reason behind this spurt in oil prices is due to speculative forces or increasing demand from developing countries like India, China or Brazil or due to some other reason, but this increase is bothering the bottleline of Indian oil companies. India imports more than 70% of its crude requirements. And yes, we have a declining dollar and strengthening rupee which has reduced the affect of a more than US $100 per barrel crude in our kitty. But to tackle with a freely priced market in a government-controlled regime is a fight.The second part of this story is concern of government not to lose the confidence of its democratic public.

With general elections not so far, UPA is taking all possible steps to keep the voters happy. One of the most sought after way to do so is to keep oil prices under control. Although about 50% of the retail crude prices consist of taxes (excise and sales tax), but lowering of taxes would mean burdening the exchequer. Due to control of government, our oil companies are not able to increase the prices with increasing costs. This has led to a daily loss of around rupees 200 crores for them.

By stopping oil companies from increasing oil prices, government is supposed to actually compensate them. But instead of subsidizing oil companies, government is fooling them by issuing “oil bonds” which have a maturity of 10 to 20 years. These bonds are not so liquid which has worsened the problem of these oil companies. Though the government has apparently done its part by providing companies with bonds but the companies have to incur operating expenditures like salaries, interest, etc. And to keep the business going these companies require funds.

Also another affect of government suppressing oil companies is that these companies are becoming unattractive investment for investors. These investors are looking for more profitable investment avenues.Now if the government wants to provide funds to oil companies (for keeping oil prices fixed), then it will have to sacrifice with its fiscal budget statement which will increase its deficit figure.

But it is resorting to what our Ministry of Human Resources did few years back. Ministry officials took food required to be supplied in government schools and compensated Food Corporation of India (FCI) with bonds. By doing so, the Revenue got away with providing FCI with bonds and without taking these bonds on its books. The reason why governments are reluctant to take these bonds on their books is that they are under obligation created by Constitution (Financial Management…) to consistently reduce their fiscal deficits. So to keep their performance upbeat, governments are playing with companies and nation as a whole.

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Conclusively what government is ought to do is

1. Allow oil companies to increase prices, which are market-driven.

2. If the above solution does not fall in government’s comfort zone, then it should compensate companies by paying for its subsidizing.

3. If government wants to make the losses made by oil companies good by issuing oil bonds, then it should take the bonds amount on its books.