India fixes prices for key oil products to support a cross-subsidy scheme aimed at helping low income groups and people living below the poverty line, who rely on products like kerosene for cooking and lighting.

Two years ago the government announced it would phase out the administered pricing mechanism for all products except kerosene and liquefied petroleum gas (LPG).

Prices for diesel, which accounts for 45 per cent of country's consumption, were last hiked in March, but are now below world prices. "The diesel pricing mechanism is supposed to fix domestic prices to reflect landed cost, and an upward movement in the price may beeffected after the new government takes charge," ICICI Securities and Finance Company Ltd said in its debt market update on Wednesday.

Retail prices vary from state to state, but in Maharashtra state diesel sells at around Rs 12.23 ($0.28) a litre. Analysts say the new government may push through a diesel price hike while year-on-year inflation is low.

Wholesale price inflation was running below two per cent earlier this month, its lowest for two decades, and consumer price inflation was just above three per cent in July, its lowest since the current index series began 10 years ago.

The impact of the surge in global prices to 22-month highs on the Oil Pool Account, which holds balances of the government's cross-subsidy scheme, will be marginal.

The government repaid most of what it owes to oil companies for selling products at subsidised prices, analysts said.

"The pool will generate a deficit over the next two months, but there is no cause for worry. It will be manageable," Sabnis said.

"FromAugust, the Oil Pool Account will generate a deficit of Rs 3.5 billion per month," a government official said.

The Oil Coordination Committee (OCC), which manages the Oil Pool Account, had been generating surpluses earlier by not lowering local prices of petrol, aviation fuel and diesel when import prices were lower, analysts said.

The surpluses enabled OCC to redeem most of the special seven-year bonds issued by the government in September 1997 to seven oil companies in lieu of dues of over Rs 182 billion. Only Rs 4.67 billion due to the Oil and Natural Gas Corporation(ONGC) were unpaid at the end of July.

OCC also makes margins on crude oil produced by ONGC and Oil India Limited which is sold to the OCC at 77.5 per cent of international prices.

World crude prices, which languished at 25-year lows around $10 a barrel last year, are now over $22, and prices may not ease. Dubai October crude is now sharply higher at $20.6.

The government, assuming a crude oil price of around $16, budgeted for an oilimport bill of around $6 billion in 1999/2000 (April-March), but analysts feel the bill will shoot up. Estimates for this year's imports range from $7 to $10 billion.

India's consumption of oil products jumped 9.4 per cent to 22.56 million tonnes in the April-June quarter of 1999/2000 from the same quarter a year ago.