Oil Bonds

• Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy.
• The UPA-era oil bonds are to beblamed for the high fuel prices.

About :

• Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy.
• These bonds are typical of a long-term tenure like 15-20 years and oil companies are paid interest.
• Before the complete deregulation of petrol and diesel prices, oil marketing companies were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price.
• This ‘under-recovery is typically compensated through fuel subsidies allocated in the Union budget.
• However, between 2005 and 2010, the UPA government issued oil bonds to the companies amounting to Rs 1.4 lakh crore to compensate them for these losses.

Why do governments issue such bonds?

• Compensation to companies through issuance of such bonds is typically used when the government is trying to delay the fiscal burden of such a payout to future years.
• Governments resort to such instruments when they are in danger of breaching the fiscal deficit target due to unforeseen circumstances that lead to a collapse in revenues or a surge in expenditure.
• These types of bonds are considered to be ‘below the line’ expenditure in the Union budget and do not have a bearing on that year’s fiscal deficit, but they do increase the government’s overall debt.
• However, interest payments and repayment of these bonds become a part of the fiscal deficit calculations in future years.