Describing the government’s decision to raise prices of diesel, cooking gas and kerosene as inevitable, the Prime Minister’s economic advisor today said that it would push inflation into the double-digit zone.
“Due to the rise, inflation could be close to 10 per cent by July,” Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan said.
However, he added, the inflation numbers would subside after the initial surge. “I do expect that after initial correction, inflation will come down to 6.5 per cent by March 2012,” Rangarajan said.
The decision to raise fuel prices, he said, was inevitable in view of the rising crude prices in the global market and its impact on the fiscal deficit. “Since correction was needed in order to contain fiscal deficit, the move is welcome.”
On June 24, the government increased the price of diesel by Rs 3 a litre, kerosene by Rs 2 a litre and cooking gas by a steep Rs 50 a cylinder. This followed the increase of over Rs 5 per litre on petrol announced by oil marketing companies in mid-May.
The overall inflation was 9.06 per cent in May, up from 8.66 per cent in April. The Reserve Bank had recently said it expected inflationary pressure to remain high, at an average of nine per cent till September on account of high global commodity prices. The PMEAC chief’s views found support from other experts and economists.
“Going ahead, the rate rise will adversely affect the inflation situation. While we expect inflation numbers in June to remain above nine per cent, the real pinch will be felt in July when it may even touch double-digit,” Deloitte, Haskin & Sells director Anis Chakravarty said.
He said while the impact on inflation was inevitable, the government did not have any other option but to increase the prices in light of huge under-recoveries.
The price rise would help the oil companies limit their revenue loss by Rs 21,000 crore, but they would still end the financial year with about Rs 121,704 crore of revenue loss.
“It (the hike) will increase inflation by about 50-60 basis points,” Crisil chief economist D K Joshi said. With volatility in oil prices in global market, where crude is ruling above $105 per barrel, the rise in petroleum product prices was widely expected, he said.
“Inflation was being artificially suppressed as the price hike was being delayed,” Joshi added. Even as global commodity prices remain high, the rate of price rise of food items have also soared in recent weeks after a period of moderation.
Food inflation touched a two-and-half months’ high of 9.13 per cent for the week ended June 11 and experts said rising food prices will also impact the headline inflation.
