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Oil bonds at a stunning 1.8% of GDP

The combined fiscal deficit and the two off-budget liabilities will alone take the total deficit to 4.5% of GDP this year, assuming that the fiscal deficit figure will be unchanged

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The combined fiscal deficit and the two off-budget liabilities will alone take the total deficit to 4.5% of GDP this year, assuming that the fiscal deficit figure will be unchanged

By opting for oil bonds as a panacea for the woes of the petroleum and fertiliser companies with what seems to be reckless abandon, the Centre is leaving a dubious fiscal legacy to the future governments


At long last, the Centre had decided to act; though belated, it was on expected lines —- a combination of duty cuts, selective price increases and a sharing of the under-recoveries between the government and upstream oil companies and the oil marketing companies absorbing the balance of the loss of Rs 29,000 crore incurred by them in the sale of sensitive petroleum products.

By any reckoning, the scale of the oil bond issue is mind-boggling.
At Rs 94,601 crore, it marks an astounding increase of 365% over the size of the oil bonds during 2007-08 (Rs 20,333 crore) and also exceeds by a hefty 41% the total oil bonds issued since its inception in 2002, that is Rs 66,967 crore.

To appreciate the dimension of the oil bonds to be floated in 2008-09, it needs to pointed out that the sum is only marginally less than the Centre’s entire non-tax revenue estimated at Rs 95,785 crore, while the net market borrowings will be higher by a few thousand crore at Rs 100,571 crore.

In the current fiscal, the fiscal deficit is projected at 2.5% of the GDP at Rs 133,287 crore.

The off-budget liability on account of the contemplated oil bonds alone will approximate to 1.8% of the GDP.

Also, the budget had envisaged an interest outgo under this head at Rs 5,520 crore. Assuming a coupon rate in the vicinity of 8%, these bonds will also bloat the interest payments to a much higher figure, depending on the timing and the interest tag attached to them.

But, beyond the current year, the interest burden will become onerous and will cost the exchequer around Rs 13,000 crore.

Besides, the Centre will have to factor in the unpaid subsidy bill to fertiliser companies.
Last year, they were issued bonds worth Rs 7,500 crore, leaving an unpaid balance of about Rs 10,000 crore.

In addition, it is safe to assume that, in the context of rising crude oil prices, both naphtha and natural gas —- the preferred feedstock —- will become dearer and will impact fertiliser prices.

If the policy preference is for status quo, then fertiliser subsidy projected in the budget for 2008-09 - Rs 20,139 crore - may be an underestimate.

The off-budget liability due to oil bonds and fertiliser bonds will be at least 2% of the GDP, while the fertiliser subsidy will be higher than envisaged.

Also since kerosene is untouched in the current round of rationalisation of duties and price hikes, the petroleum subsidy will also be off the mark from the budgeted Rs 2,884 crore.

Whichever way one looks at it, the fisc will take a hit during the course of the current financial year.

The combined fiscal deficit and the two off-budget liabilities will alone take the total deficit to 4.5% of GDP this year, assuming that the fiscal deficit figure will be
unchanged.

Already, some doubts are in order. The budget has not made an explicit provision for the implementation of the Sixth Pay Commission’s recommendations and there is some ambiguity about the government’s precise on account of the farm loan waiver.

A solution of sorts to tackle the problem posed by the “oil-on-the-boil” syndrome has been found.

It smacks more of expediency than a well-orchestrated response. But, what if crude continues to move relentlessly up in the coming weeks and months as all indications are?

The trouble with this approach is that, OMCs will continue to bleed and the cost of burden-sharing on the part of the upstream companies will rise.

Both will become victims of a serious financial crunch, which will adversely hit their plough back and investment plans.

The government, too, will not emerge unscathed. The resort to oil bonds is neither fiscally prudent nor does it tackle the problem posed by spiralling oil prices effectively.
They may be an off-budget liability for now; but the interest costs will make a dent in the revenue budget immediately, while the repayment of these bonds in the year of redemption has to be provided for in the budgets of the future years.

This will be constraint in the framing of the ensuing fiscal policy statements. By opting for oil bonds as a panacea for the woes of the petroleum companies —- and one may add, fertiliser companies —- with what seems to be reckless abandon, the Centre is leaving a dubious fiscal legacy to the future governments.
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