Bonding with oil in election time

Oil bonds don’t solve the problem, they only postpone the solution

The expected has come to pass. The Centre has announced the issue of oil bonds to the petroleum marketing companies to the tune of Rs 23,547 crore in the current fiscal, of which the first tranche of Rs 12,000 crore may be only days way - before the oil majors finalise the second quarter results which otherwise would make a sorry reading.

Simultaneously, the government had opted to maintain the status quo regarding the retail price of various petroleum products while deciding to extend the subsidy scheme for kerosene and LPG for another three years from April 1, 2007.

In both, dithering is the name of the game. While a partial increase would have been justified because of the noticeable hardening of the Indian basket of crude and because it is the logical thing to do under the circumstances, with elections due in some states while the Central government is wobbly on account of the nuclear impasse within the ruling coalition, a “do-nothing” stance has been more or less mandated.

So, oil bonds on a massive scale have been resorted to, lest the oil companies are bled white due to huge losses on the sale of key petro goods.

As regards subsidy on kerosene and LPG - which should have been phased out by now, a new lease of life is conferred on them. Here too, some increase would have been desirable, in view of the none-too-happy state of the Union finances.

In what seems a display of false bravado, the petroleum minister, has ruled out any hike in the near future;

Murli Deora, in fact sounded boastful when he averred that, “We have kept our
promise to the people not to raise the price of petroleum products”.

One wonders how he could be so categorical, considering the volatile nature of the international oil market, unless of course, he is contemplating another round of oil bonds to bail out the oil companies when the crunch comes.

But, there are larger questions to contend with. Can expediency be an answer to the oil crisis of the type we are facing?

We depend on crude imports to the tune of 75% of our requirements. Also, the oil intensity of our development is rather high. It is only natural that petroleum pricing policy must take into account this reality and move in tandem with the trends abroad.

Such a step was contemplated  when the administered price mechanism was sought to be dismantled from April 1, 2002, that is more than five years ago and market forces would be key element in the determination of petroleum products.

For reasons political, this deadline was not adhered to and even now, the old habits are firmly entrenched. Abroad, the transmission of impulses from the crude market to the home market is immediate; consumers may protest but at the end of the day, they fall in line.

In India, we have a different dispensation and given our ingenuity, we try to bypass the normal mechanism by such novel contrivances as asking the upstream companies to foot part of the bill and, by the issue of oil bonds. When any petro product needs to be subsidised, the target should be clearly identified so that the budget subsidy does not balloon up.

However, there are more serious issues that should engage our attention. Oil bonds do not solve the underlying problem; they merely postpone the solution which by delay and dithering becomes more complex with the passage of time.

They are a short-term measure and the impact will be felt by the future generations as these off-budget liabilities have to be liquidated at some point in the future.

More important, fiscal probity demands that oil bonds be a part of the fiscal deficit by being included as a part of the borrowing programme of the government during the year.
The Prime minister’s Economic Advisory Council in its July 2007 report voiced its concern over this practice, saying that they must be taken into account for a proper and fuller accounting of government transactions

Their exclusion means that the fiscal deficit is understated and that even if the Centre meets the benchmarks laid down by the Fiscal Responsibilty and Budget Management Act, the actual fiscal deficit is higher than published in the budget documents.

Post script: Oil bonds are in the news but a similar practice in respect of fertilisers has gone unnoticed. In August last, the government has, for the first time, issued fertiliser bonds worth Rs 7,500 crore to counter and partially meet the subsidy burden stemming from rising cost of feedstock and fertiliser imports.

This sort of bond issue ducks the problem instead of coming to grips with it.