The wags that spread this tale are not entirely talking through their hats. Pertinent quarters of government (read as Oil Coordination Committee and Union ministries of petroleum and finance) have already begun work on the pros and cons of raising prices of controlled petroleum products.

The entire phase-out programme for the administered pricing mechanism (APM) in petroleum products is being examined afresh, now that unpredictable highs in global oil prices have thrown the subsidy phase-out programme out of gear. The subsidies built into the retail prices of kerosene supplied through the public distribution system (PDS) and liquefied petroleum gas (LPG)have gone up, instead of falling this year.

The subsidy on LPG should dwindle to 15 per cent by 2002 from close to 40 per cent now. About more than 200 per cent subsidy on kerosene is intended to drop to 33 per cent by then.

The 60 per cent increase in the prices of imported petroleum products in the last six months have pushed up the subsidy components of both kerosene and LPG. The subsidy on kerosene is expected to cross Rs 5,000 crore by the end of March next year. Another Rs 4,000 crore subsidy on LPG should land the oil pool account a deficit of Rs 9,000 crore by year-end.

The subsidy on diesel, phased out two years ago, has crept back into the retail price of the fuel, that accounts for half of all the petroleum products consumed in the country. A Rs 3 a litre increase in diesel prices is necessary to ease the tension in the oil pool account, but an obstinate petroleum minister could insist that the oil companies bear the brunt of the subsidy that has crept into diesel pricing now.

The retailprice of diesel pays for the marketing margins of oil companies, the freight equalisation scheme and even chips into the oil pool to some extent. At a rough estimate, a quarter of a rupee out of the sale of a litre of diesel (priced at Rs 11 a litre in the capital) goes to the oil marketing company. If Mantriji balks at hiking diesel prices, marketing companies could lose their measly margin.

A more benevolent government could ask the revenue department to make the sacrifices. Knocking off a few points from the 16 per cent excise duty on high speed diesel (HSD) would make power generator and transportation fuel more cheaper. The revenue department would of course, lose a few hundred crores from the Rs 3,471 crore of excise collection it made from diesel oil last year. The Budget estimates for this year are a modest Rs 2,666 crore. Alternatively, the 32 per cent customs duty on diesel could be pared down.

The retail price of diesel includes the customs duty too, since prices at home are on an"import-parity basis." The import parity price of all petroleum products is the landed cost, including import duties. Thinktanks agree that the Centre has the option of foregoing its roughly Rs 20,000 crore of revenue from petroleum products or pushing ahead the administered pricing mechanism (APM) dismantling schedule. Should it attempt to have its cake and eat it too, Kalu Bhau could turn out to be a very disappointed man.

Could a government that comes to power at the end of the third general elections in three years risk the wrath of Kalu Bhau? A more pertinent question, say critics of the oil industry restructuring programme, is could Kalu Bhau afford free pricing today, in the year 2002 or at any time?According to the schedule drawn up for the count-down to market driven rates in petroleum products, the subsidies on LPG and kerosene will not vanish, but only pass on to the Union Budget in the year 2002. The excise and customs duties on petroleum products should also drop drastically by then. Thecustoms duty on crude oil is expected to come down to nil from 22 per cent now. The import duties on petrol, LPG and jet fuel should come down to 15 per cent from the present 30 per cent. The Union Budget would get the burden of a new expenditure in the form of LPG and kerosene subsidies even as its income from petroleum products is slashed by half.

The alternative is to keep the oil pool account, which robs Peter (read petrol and jet fuel users) to pay Paul (kerosene and LPG consumers), the subsidies and the ``over-recoveries'' from petrol and aviation turbine fuel (ATF). Since the BJP-led coalition government did not roll back subsidies as scheduled, or raise diesel prices since April, the oil pool account will find itself more or less in the position it was in April 1997, when the deficit in the account was Rs 18,000 crore.

The Rs 8,090 crore subsidy on diesel was rolled back then. A slight increase in the prices of motor spirit and LPG subsequently, generated a healthy surplus in the oil pool. Thedeficit dwindled, was converted into oil bonds and amortised out of the pool at jet speed after March 1998.

The oil pool is now left with Rs 380 crore of oil bonds and some interest payment of it and by March next year the bonds would have been paid for. The subsidy cut-back programme could have begun then. The sky-high prices of imports and the ``import-parity pricing'' allowed to oil marketing companies at home, imply an additional subsidy burden on the oil pool account if Kalu Bhau has to continue to pay Rs 2.50 a litre for his kerosene, Rs 146 a cylinder for LPG and Rs 11 a litre for diesel.

The entire oil sector reforms now rest on Kalu Bhau's shoulders and the extent to which he matters to his elected representatives.