More fuel to inflation fire

According to government officials, several fiscal, administrative and monetary measures have already been taken since Budget 2008-09 to control price rise. “So, no more harsh measures,” said an official, adding that the Reserve Bank of India (RBI) was continuously monitoring liquidity conditions and would act when required.

The price increase in LPG, diesel and petrol – that have a combined weight of 4.75 per cent in the WPI basket – will straightaway result in an addition of 51 basis points to inflation. The WPI index for the week-ending June 6 will factor in the hike in fuel prices, but the numbers will be officially announced by the commerce and industry ministry only on June 20. Credit rating agency Crisil has estimated the indirect impact of the fuel price hike to add another 44 basis points. This will mean that inflation will cross the 9 per cent mark given the fact it has already touched 8.1 per cent for the week-ended May 17.

Rupa Nisture, chief economist, Bank of Baroda, said that the inflation rate for the week-ending May 24 – to be officially released this Friday – was expected to be 8.33 per cent. “The rate for the week-ending June 6 would definitely be over 9 per cent.” For the full fiscal, she has forecast it to be 8.5 per cent.

Besides, the Rs 22,660 crore revenue losses due to duty cuts announced today on crude and fuel products could possibly require the government to increase its market borrowings. “This will result in crowding out of private investment,” Nisture said. To tame inflation, further monetary tightening too is not ruled out. “Further measures such as an increase in the cash reserve ratio are likely,” said Dharmakriti Joshi, principal economist, Crisil. This would further raise costs for the industry and affect growth prospects adversely. Nisture has estimated that the GDP growth rate would be 7.5 per cent for 2008-09 compared with the government’s estimates of 8-8.5 per cent. A lower revenue mop-up will also leave lesser funds for the government’s various social and infrastructure development programmes. Already, the finance ministry has said it would not be able to fund some part of the massive infrastructure programme under the Jawaharlal Nehru Urban Renewal Mission. This too will impinge on public investment and impact growth prospects this fiscal.