 "LPG")
The cut in cooking gas prices by Rs 200 per cylinder, announced on Tuesday, may reduce retail inflation rate by 20 to 30 basis points (bps) in September.
According to analysts, this move will bring inflation below the central bank’s upper tolerance limit of 6 per cent.
An analysis by Citi Research noted that LPG has a direct weight of 1.29 per cent in the consumer price index (CPI) and could indirectly impact prepared meal prices with a lag.
“This could lower inflation by 30 bps, and along with tomato price reversal, it raises the possibility of a below 6 per cent print in September 2023. We estimate consumer savings from the LPG price cut for the rest of FY24 to be Rs 200 billion or 0.07 per cent of the gross domestic product (GDP),” the Citi report said.
IDFC First Bank’s research points towards a similar trend in the September inflation numbers.
It said the maximum impact of the decline in vegetable prices will be felt in the September CPI print, which is tracking at 5.6 per cent.
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“Our September estimate assumes further decline in tomato prices and incorporates the impact of the LPG price cut,” it said.
The decision to cut the price of domestic LPG cylinders by Rs 200 for all connections comes amid high inflation and ahead of the crucial state and general elections.
Retail inflation surged to a 15-month high of 7.44 per cent in July on the back of skyrocketing prices of vegetables, pulses, cereals, and spices.
In its latest monetary policy review, the Reserve Bank of India (RBI) raised its inflation forecast to 6.2 per cent for the September quarter and 5.4 per cent for FY24 while keeping the policy rate unchanged at 6.5 per cent.
“The LPG price cut will surely have a soothing effect on inflation. We have to see how long it will last and whether it could be rolled back after the elections. This cut could also be a precursor to other subsidies,” said Madan Sabnavis, chief economist, Bank of Baroda.
However, IDFC’s report said there is a risk to inflation estimates from the uneven monsoon with August rainfall deficit tracking at a historical high.
One of the key things to watch would be any spike in onion prices due to possible demand-supply shortfall in September.
Price of the 14.2 kg domestic LPG cylinder was last changed in March this year when it was raised by Rs 50.
Before this, the domestic LPG cylinder price was raised back in July 2022.
The last fiscal intervention on fuel prices was in May 2022 when the government had cut excise duties on petrol and diesel.
It also announced a Rs 200 LPG subsidy for poorer consumers under the Ujjwala scheme for up to 12 cylinders.
Economists feel that the market focus will now shift towards petrol and diesel prices, which have remained unchanged for over a year now.
“Unlike LPG, the current international crude and product prices do not give oil marketing companies (OMCs) room to cut petrol/diesel retail prices on their own. Any potential reduction in these prices may need to come via excise duty cuts, which cannot be ruled out in the run-up to the crucial state elections,” the Citi research said.
According to it, a Rs 5 per litre cut in excise duty would entail a fiscal cost of Rs 400-450 billion or 0.15 per cent of GDP for the second half (September-March) of FY24. It will bring down inflation by 10-15 bps.
Experts feel that the move is likely to start discussions on whether there will be more fiscal measures to control inflation and support rural incomes in a pre-election year.
“The key issue is finding a balance among various government objectives of inflation control, ensuring adequate availability of foodgrains, supporting rural income growth, maintaining fiscal stability, and giving a free hand to OMCs,” Citi Research said.
