Crude, capital flows threat to inflation

ECONOMIC SURVEY 2003-04/ INFLATION AND INTEREST RATES

Rising global crude prices pose a threat to the inflation rate, estimated for the current fiscal at around 5 per cent.

The Economic Survey also hinted that higher capital inflows could impact monetary conditions during the year.

Containing annual inflation rate to medium single-digit levels was thus seen as one of the five key challenges facing the economy.

The surge in international oil prices, though unlikely to stifle growth recovery as observed in the recent past, threatens to dampen some of the momentum and exert upward pressure on inflation rate, stated the government's report card for 2004-05.

"Barring the uncertainties of international prices of petro products, there is reason to believe that the inflation rate during 2004-05 would remain around 5 per cent as projected by the Reserve Bank of India," the survey added.

The survey highlighted the country's dependence on crude oil imports from West Asia, making it vulnerable to price changes.

The inflation rate pertaining to coal and electricity remains at fairly high levels contributing to more than 6 per cent average inflation rate for the fuel group in 2003-04.

In contrast, current conditions look more favourable for the primary sector "" which suffered in 2003-04 on account of the bad monsoon "" and is thus expected to keep the inflation rate in fiscal 2005 at a level lower than the average 2003-04's inflation rate of 4.2 per cent, the survey stated.

"Year 2004-05 is likely to witness a relatively lower inflation rate in the manufacturing group compared with the annual average of 5.7 per cent in the financial year 2003-04," it added.

The economy has enjoyed the benefits of a relatively low inflation with point-to-point inflation rate declining sharply to 4.6 per cent during the quarter ended March 2004.

The drop in inflation rate, which started mid-February 2004, has been induced mainly by falling prices of primary articles and subdued inflation in the fuel group.