Rising crude oil prices to keep inflation high

Rising crude oil prices to keep inflation high

New Delhi: The steps announced in the budget to check price rise, such as boosting farm productivity and cutting fuel use, will be effective only in the longer term, experts said, with ballooning social expenditure and rising crude oil prices expected to keep inflation high.

The budget announced funding for production of pulses, oil palm, cereals and vegetables, increased credit flow to farmers and said cold chains would be augmented, but lacked immediate measures to douse high prices of food.

Finance minister Pranab Mukherjee announced sops for lowering fuel consumption, such as customs duty exemption on hybrid vehicle parts and batteries for electric vehicles, and announced direct transfer of subsidies to needy people using kerosene and cooking gas, but did not directly lower oil prices flared by political tensions in West Asia and North Africa.

“The medium term fight against inflation is being addressed, but in the short term, maybe in next two-three years, we will see inflation between 6-7%," said Jamal Mecklai, chief executive officer of Mecklai Financial Services, a treasury risk management consultancy in Mumbai.

Wholesale-price inflation has remained above 8% through the greater part of this fiscal year, seeing its highest point at 11% in April, thwarting the government’s targeted figure of 5.5%. Inflation has been pushed up mainly due to high food and fuel prices globally on account of weather-related disruptions and concerns over a steady oil supply from West Asia and North Africa, while in India, poor supply chain management and rising disposable incomes have added to the pressures.

“While the fiscal deficit number for FY12 is shown to be reasonable, its extra achievement depends upon how the government manages to control its subsidy burden," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. “If the consideration of the political economy does not facilitate these measures, the budget will have significant inflationary impact."

The higher social spending that puts more money in people’s hands, coupled with high oil prices that could be passed on to consumers, are expected to fan inflation in the immediate future, analysts said.

“Our assumption is that oil prices will stay firm. Based on that, the subsidy will be too big and the government could pass it on to people," said Rakesh Arora, managing director and head of research, India, at Macquarie Capital Securities in Mumbai. Arora said he saw inflation at March end at 7%. Mukherjee’s increase in agriculture credit flow, wage and compensation increases for anganwadi, or government-run creche, employees, and enhanced tax exemption limits for senior citizens would add to disposable incomes and prove to be mildly inflationary, analysts added.

However, the double-digit inflation seen during this year may be tempered as the budget could help strengthen the rupee, said Kishore Narne, senior vice-president, commodities, Anand Rathi Commodities, a Mumbai-based brokerage in Mumbai.

“The budget is good for the currency," said Narne, who is seeing inflation at 7-7.5% by April end. “The raising of limits on foreign direct investment, foreign participation in mutual funds and infrastructure bonds could increase inflows and the rupee could easily target 43 to a dollar."

In addition, a possible softening in steel prices with export duty on iron ore hiked and customs duty on stainless steel imports removed, could also contribute towards moderating inflation.