India, Malaysia risk inflation, political backlash with price hike

India, Malaysia risk inflation, political backlash with price hike
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First Published: Thu, Jun 05 2008. 11 37 PM IST
Updated: Thu, Jun 05 2008. 11 37 PM IST
New Delhi: Asian governments are falling behind in their battle against record oil prices, risking public protests, higher interest rates and slower growth.
Prime Minister Manmohan Singh and his Malaysian counterpart, Abdullah Ahmad Badawi, relaxed fuel price controls on Wednesday, joining Indonesia, Taiwan, Pakistan and Sri Lanka in boosting costs for business and consumers.
The moves will drive India’s inflation to 8.5%, a 13-year high, said Lehman Brothers Holdings. Malaysia’s consumer-price growth may double to more than 7% this month, said Goldman Sachs Group.
Central banks in the region may also follow Pakistan in raising rates, as policymakers lose bets that a globalslowdown would temper price rise. Higher petrol, diesel and cooking gas charges are “inevitable” as India can’t afford to shield its 1.2 billion people forever, Singh said in a televised address. His four communist party allies have scheduled a week of protests.
“This is going to cost these governments politically,” said Michael Spencer, Hong Kong-based chief economist for Asia at Deutsche Bank AG. “The governments are basically saying they can’t keep subsidizing fuel.”
Abdullah and Singh are risking a political backlash after losing ground in elections in the past year. Abdullah’s coalition lost its two-thirds majority in Parliament and ceded control of five states in general elections on 8 March. Singh’s Congress party has had nine electoral setbacks in 11 provincial polls since January 2007.
His majority hinges on support from four communist parties, which pledged to block rail and road routes to protest against the price hike.
The main opposition, Bharatiya Janata Party, says the government has run out of ideas to tackle the oil crisis. If a rise in fuel prices “is inevitable, then the exit of the Prime Minister and his government is inevitable as well,” its spokesman Rajiv Pratap Rudy said.
India, which imports 70% of its oil, previously raised fuel prices in February, the first time since June 2006. Cooking gas prices have been capped since April 2005.
India also cut customs duties on petrol and diesel by two-thirds to 2.5% and scrapped a 5% import tax on crude to reduce revenue losses at government-run refiners that have reached a record $1 billion (Rs4,260 crore) a week.
Premium petrol in New Delhi costs Rs207 (about $4.80) per gallon, compared with $3.13 in Malaysia, $4.16 in the US, $8.75 in France and $9.89 in the Netherlands.
Malaysia and India are using the same tactic as some of their neighbours. Indonesia raised fuel prices by an average 29% on 24 May, the first increase in three years, to cut subsidy costs. Ceylon Petroleum Corp., Sri Lanka’s government oil firm, hiked fuel prices for the second time this year on 25 May to trim losses. Lanka IOC Ltd, the Sri Lankan unit of India’s biggest refiner, Indian Oil Corp., boosted diesel prices three times and petrol once this year.
Reserve Bank of India governor Y.V. Reddy has called inflation “totally unacceptable”, as it gives little room to spur an economy that’s growing at the slowest pace since 2005. The central bank has held interest rates at 7.75%, near a six-year high, since March 2007. It has relied on telling banks to set aside more cash against deposits to tackle inflation; it raised the cash ratio twice in the past two months to the highest level in seven years.
Malaysia’s inflation rate may jump to a nine-year high after the fuel price rise, central bank governor Zeti Akhtar Aziz said. “Prices will adjust and it will peak sometime in the early part of next year,” Zeti said. “During this period, there have to be adjustments to these price increases.”
Bloomberg
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First Published: Thu, Jun 05 2008. 11 37 PM IST