Get ready for higher inflation

The government just increased the headache for households, itself and the Reserve Bank of India by increasing fuel prices as inflation is set to cross the double digit mark. The increase in diesel prices alone is expected to add 30 basis points (100 basis points equal one percentage point) to inflation and is going to have a cascading effect on prices of almost all commodities - from fruits and vegetables to industrial products - as transportation costs would go up due to the the hike of Rs 3 a litre.

"The total (direct and indirect) impact of the diesel price increase could be around 100 basis points," said D K Joshi, chief economist at ratings agency Crisil . Diesel has weight of 4.67% in the wholesale price index and any increase in diesel prices impact prices across the economy as goods are transported in trucks. Diesel is used as an input in manufacturing units as well in the farm sector. Add to that the impact of the Rs 2 hike for petrol and increase in cooking gas prices by Rs 50 per the inflation numbers -- which have been troubling households as well as policymakers for the past several months - would go past the 10% level over the next few weeks.

Already, based on provisional data, it was estimated at 9.06% in May. And if past trends are anything to go by, an upward revision is a near certainty.

Inflation has remained stubbornly high for the past more than a year and the government had dragged its feet on raising diesel prices fearing political backlash but was left with no choice due to the mounting losses of state-run oil firms. Joshi said an increase in diesel prices impacts core inflation which is currently an issue of concern. Food inflation which had shown signs of moderation for a few weeks have again started rising and latest data shows that it accelerated to 9.13% in mid-June due to pricey protein items. Monsoon is an added risk given that the forecast is not as optimistic as it was earlier.

Apart from the cost of key household items rising faster than earlier, high inflation is also expected to translate into further increase in your EMIs as economists expect RBI to raise interest rates further.
The price hike has not just upset household budgets but could also have a major impact on the government's own budget numbers.

By it's own admission, the Centre stands to lose Rs 49,000 crore during the financial year. With three months of the year gone, the loss might be 25% lower at Rs 36,750 crore. With uncovered losses of Rs 1.5 lakh crore for state-owned oil marketing companies -as they continue to lose money by selling subsidized fuel - the government could be in for some higher expenditure as well to meet the increased subsidy bill. Oil companies, of course, would be cajoled into taking their share of the cut, which will reflect in a hit on their bottomlines - and lower dividend for the government.


Source: Economic Times

Thanks and Regards,
Sanchari Sinha,
Intern at DENIP Consultants Pvt. Ltd.