Double-digit inflation seems all set to come back following the hike in prices of diesel,kerosene and cooking gas on Friday. While the government forecast a rise of 30 basis points in headline inflation,most economists expect headline inflation to increase by 50 to 70 bps in the next month and shoot up further in the coming months.
We expect an immediate hike in wholesale price index based inflation by 70 basis points,and it will increase to 10 per cent by August,and further to 11 per cent by September, said Abheek Barua,chief economist at HDFC Bank,adding that prices would start to decline after that due to a base effect.
Headline inflation touched 9.06 per cent in May,driven by higher prices of manufactured goods. Economists believe that the hike in diesel prices will fuel core inflation further as it will translate into higher costs for transportation and production of manufactured items.
DK Srivastava,director,Madras School of Economics agreed and said,The increase in prices of diesel and cooking gas will have a cost push effect on inflation and it is likely to rise by about 40 basis points in the near term.
Prime Ministers Economic Advisory Council Chairman C Rangarajan also expects inflation to be close to 10 per cent by July. The finance ministry contends that the fuel price hike was inevitable. This is a difficult year and our choices are limited. A price rise in the short term is better than a higher subsidy burden in the long run, a finance ministry official said.
The only saving grace could be the recent softening in global crude prices that have fallen to less than $100 a barrel. Any softening in global crude prices will also help the government cut down on its subsidy burden and consequently on the fiscal deficit as well. he Rs 3 per litre hike in diesel prices is expected to help the oil companies limit their revenue loss by Rs 21,000 crore,but they would still end the fiscal with about Rs 1,21,704 crore of revenue loss.
But analysts pointed out that the impact of the fuel price hike on the fiscal deficit would be considerably muted by the duty rejig on crude oil. What the government saved from the fuel price hike in terms of subsidies,will almost be matched by the revenue losses due to its decision to cut customs duties on crude oil by 5 per cent,and excise on petrol and diesel by 5 per cent, said Sunil Sinha,head of research and senior economist at rating agency Crisil,adding that the fiscal deficit is likely to be closer to 5 per cent of the GDP in 2011-12,as against targeted 4.6 per cent. There was a substantial under-budgeting of subsidies at the start of the year. We expect the fiscal deficit to touch about 5.1 to 5.2 per cent of the GDP in 2011-12, he said.