Rs640 crore a day, or Rs2,33,600 crore a year – that is what our state owned oil companies will burn in under-recoveries, if crude oil prices remain at the current levels and retail fuel prices are not hiked. Another increase in fuel prices is very unlikely as general elections draw close. As for crude oil prices, most – including the US Energy Information Administration – expect prices to average above $100 per barrel in 2008.

Rs2,33,600 crore is a lot of money, slightly more than the amount expected to be collected as corporate income taxes this year. It is over 60% of the total annual plan outlay of the central government and nearly 2.5 times the total plan spending on the social sector budgeted for this fiscal.

Thanks to the ingenious method of ‘cost-sharing’ invented by the government, we are yet to feel the real pain of this profligacy. Part of this huge subsidy bill is being underwritten by upstream oil companies like ONGC with cash to spare, and the rest is being transferred to future tax-payers in the form of oil bonds.

But, at the end of the day, this is a cost to the nation – whether we decide to account it now or in future. There are some obvious benefits – like creating the illusion of low inflation which helps to keep interests rates low. Lower energy prices will also have a beneficial effect on consumption, which in turn will help support economic growth.

Are these benefits worth the cost? It depends on how long the government can continue this balancing act. Beyond a point the cost will invariably become unbearable as there are other populist costs that are equally important from a political perspective vying for the same pool of government resources – like the farm loan waiver scheme.

It would have been easier for the government if inflation had remained under control, giving the RBI some leeway to cut interest rates and support growth. Higher growth would have kept government revenues buoyant and subsidy costs would have paid off at least partially.

With inflation at nearly 7.5%, there is no scope for a rate cut even though growth is clearly faltering. If this scenario is unchanged, outlook for the next financial year will also be lowered and the next government will inherit a difficult economy. As growth falters, growth in tax revenues may decline. Populist schemes already announced, which will have to be paid for in the coming years, may worsen the situation.