Oil hike would have blunted base effect

INFLATION AT A 16-YEAR HIGH

The effect is likely to taper off by end of October or November, says official.

The finance ministry believes that had fuel prices been hiked in line with market rates last year, when the inflation rate was low, the current rate of increase in the wholesale price index (WPI), the most followed price indicator in India, would have been much less. The inflation is currently at a 16-year-high of 12.63 per cent for the week ended August 9.

Prices of petroleum products were kept low for months even as international prices nearly doubled in the 12 months up to June 2008, when the government finally raised the rates for petrol and diesel.

Only four out of 19 products in the fuel index come under the price-control category. The price of petrol was not hiked for two years.

According to a finance ministry official, who did not want to be identified, had the fuel prices been raised last year, when inflation was hovering around 4-5 per cent, it would have had a balancing effect — the headline inflation would have increased marginally then but would have been lower than the current level.

The WPI went up from 6.5 per cent to 12 per cent in less than four months this year. This forced the central bank to increase the repo rate, the interest rate at which it lends to banks, by 125 basis points in two stages, in June and July.

It also increased the cash-reserve ratio (CRR), the amount of money commercial banks keep with it, by 75 basis points in June.

“There was a decline in the primary articles index last year. Moreover, the overall index was declining till November. These base effects, which are now playing an important role, will continue to do so for the next few months,” said the official, adding that the effect was likely to taper off by the end of October or November.

Describing the government’s steps to control prices like open market sale of rice and release of additional sugar as “short-term” policy interventions, the official said: “These will cool prices in three-six months.”

The finance ministry, in a statement today, said the government was considering a scheme to supply 400,000 tonnes of pulses with a subsidy of Rs 10 per kilogram.