Oil bonds aren’t pinching: Not cutting fuel levies because non-tax receipts might fall short of targets is unfair

In other words, the cost of servicing the oil bonds is less than 10% of the estimated mop-up in revenues from fuel taxes.

As this newspaper has pointed out, the impact of servicing the legacy oil bonds, relative to the revenues now being generated, is not exactly debilitating. On the contrary, the repayment obligations—taking into account the interest and principal repaid and due—work out to just about Rs 1.43 lakh crore over a ten year-period starting FY15. In contrast, assuming the current assorted levies on fuels remain unchanged until FY24, the government would make an estimated Rs 14.3 lakh crore in revenues after paying off the loans. That’s net of the transfers to the states. In other words, the cost of servicing the oil bonds is less than 10% of the estimated mop-up in revenues from fuel taxes.

Indeed, thanks to the unrelenting hikes in oil taxes—12 since May, 2014—the government is making a killing. The pickings in FY21 were Rs 3.35 lakh crore, on the back of steep increases in March and May 2020, and in the current year, they could well top Rs 4 lakh crore given Q1 has brought in Rs 94,181 crore. While the oil bonds were certainly not a prudent way to fund the under-recoveries of the oil marketing companies, the impact of servicing them is hardly burdensome. And it most certainly cannot be a reason for not lowering central excise duties on petrol and diesel.

The Centre’s finances in Q1 have been impressive, with collections from excise duties jumping a 92% year-on-year (y-o-y) and CGST collections soaring 113% y-o-y. The total receipts, at Rs 5.47 lakh crore, have exceeded all expectations, and the fisc, at 18.2% of the budget estimate, appears to be in reasonably good shape. Virtually every economist is convinced the estimates for net tax collections, for the current year, of Rs 15.45 lakh crore are conservative. That said, these are early days, and there is no room for complacency. It is nobody’s case the Centre should fall short of the annual revenue targets or that critical expenditure—on capex—should be withheld due to a paucity of funds.

At the same time, it would be grossly unfair if the government is holding back duty-cuts on auto fuels because it apprehends non-tax revenues will fall short of targets. Disinvestments have been painfully slow with the targets being missed consistently; in FY21, for instance, privatisation receipts were a mere Rs 32,000 crore. This year’s target of Rs 1.75 lakh crore may look to be a stretch going by the Rs 8,368.56 crore mopped up so far, but there are some big-ticket transactions lined up. The government seems confident of pulling off the sales of BPCL and Air India and even completing the LIC IPO. It is important these deals materialise because the BPCL and LIC transactions together could fetch it between Rs 1.5 -1.6 lakh crore or possibly even more. Smaller transactions like those of Pawan Hans also must be completed.

The fact is the cascading effect of rising diesel prices is hurting consumers and RBI too has pointed out high fuel prices are contributing to inflation. Even if petrol is consumed by the rich, there is a clear case for cutting levies on diesel from the current Rs 31.8 per litre. The government has budgeted for some Rs 3.1 lakh crore of revenues from diesel and petrol levies this year; given volume growth is not likely to slow, this target should easily be met even if levies are pruned.