Drop in inflation gives govt room to raise fuel prices

Drop in inflation gives govt room to raise fuel prices

New Delhi: Inflation slowed in the first week of December as food costs declined, giving the government room to raise prices of petrol and diesel for the first time in more than a year.

Wholesale prices rose 3.65% in the week ended 8 December from a year earlier, slower than the previous week’s 3.75% gain, the ministry of commerce and industry said on Thursday. Analysts had forecast 3.77%.

Inflation has held below the Reserve Bank of India’s (RBI) 5% target for five months. Still, price pressures may be reignited as the government may have to increase retail fuel costs if crude oil rises further, according to the central bank.

Tough call: Petroleum and natural gas minister Murli Deora had said a group of ministers may meet next week to discuss a fuel price hike.

“Inflation remains a key concern as food prices continue to exert pressure," said Shubhada M. Rao, chief economist at Yes Bank Ltd in Mumbai. “Going forward, the pressure on prices may further rise on increases in retail oil prices next week."

A group of ministers is likely to meet next week to discuss increasing fuel prices, petroleum and natural gas minister Murli Deora had said last week. The government hasn’t increased retail fuel prices so far this year, although global oil rates have risen morethan 50%.

The slowdown in prices will help Prime Minister Manmohan Singh to sustain the fastest pace of economic growth in 60 years and the central bank to curb prices more than the 5% year-end target.

RBI is scheduled to meet in the last week of January to review interest rates. The central bank has lifted its benchmark interest rate nine times since October 2004 to fight inflation.

India, Asia’s third largest economy, has expanded at more than 9% since April 2005, making it the fastest after China among the world’s top 15 economies. The government wants to accelerate growth to a 10% pace by 2012.

Indian policymakers succeeded in curbing inflation, which reached a more than two-year high of 6.69% in January, by capping retail prices of petrol and diesel to protect consumers from the increase in crude prices. The inflation rate dropped to 2.97% in October, the lowest since July 2002.

The government caps petrol and diesel rates to help keep inflation down and protect the poor, who make up half the country’s 1.1 billion people. Petrol and diesel prices were last changed on 15 February, when they were cut for the second time in two-and-a-half months. Cooking gas prices haven’t been raised since November 2004 and kerosene since April 2002.

“Global trends in food production and prices are going to put increasing pressure on both the availability and prices of basic food items," Singh told a conference of state chief ministers in New Delhi on Wednesday.

India is importing wheat for the second time this year to replenish stockpiles. The country’s harvest may fall unless the main wheat-growing states receive more rainfall, Union agriculture secretary P.K. Mishra had said last week.

Stagnant output may force the country to import wheat for the third year in 2008.

“A grave challenge that faces us, as well as many countries of the world, is the availability of food and the rise in food prices," finance minister Palaniappan Chidambaram had said on Wednesday.

India on Thursday said there was no change in the inflation rate for the week ended 13 October, which was 3.07%. The government sometimes alters inflation figures after two months following the receipt of updated price data.