Inflation math on slippery ground

Last Updated: Sat, Jan 19, 2013 08:42 hrs

The government move to correct oil and gas prices will raise wholesale-price inflation by 0.5-1.2 percentage points, with the impact spread over the next financial year, experts said.

They said the net impact -of the raising of diesel prices for retailers, charging a market price for bulk purchase, raising the price of unsubsidised cooking gas (LPG) cylinders, while raising the number of subsidised cylinders - will be that the Centre's subsidy burden will come down in 2013-14, allowing it to roll out the proposed Food Security Act without widening the fiscal deficit.

It may be noted that the Rs 5 a litre rise in diesel in September, with the capping of subsidised LPG cylinders to six a family in a year, resulted in raising wholesale price inflation to just 8.07 per cent in that month versus 8.01 per cent in August. Eventually, it declined to 7.18 per cent in December.

With up to 45p more per litre a month, diesel should be costlier by Rs 1.35 by March. This would mean a seven to eight basis points (bps) rise in inflation every month initially and 50 bps up altogether by March 2014, said Soumya Kanti Ghosh, chief economist with the Federation of Indian Chambers of Commerce and Industry.

"Looking at the September experience, we can say there will be up to a 24 bps increase in inflation till March 2013 and we'll see inflation stabilise from there on," he added.

Diesel has 4.67 per cent weight in overall inflation. Its rate of price rise went up to 8.94 per cent in September, compared to 0.48 per cent in August, and to 14.6 per cent in October. It remained stable at 14.6 per cent in November and December.

"The diesel price increase will show more in retail inflation than wholesale price inflation," said Madan Sabnavis, chief economist, CARE Ratings. While consumer price inflation touched an all-time high of 10.56 per cent in December, wholesale price inflation was at a three-year low. Food inflation rose in both the consumer and wholesale price indices but food articles have close to 50 per cent weight in the consumer price index but just 24.4 per cent in the wholesale price index (WPI).

A report by Bank of America Merrill Lynch said diesel price rises will add 120 bps to WPI inflation in 2013-14. "Inflation should persist around seven per cent in the March quarter. It will then likely go back up to 7.5-8 per cent in the second half of 2013", it said. Diesel to bulk users, including the railways, will now be sold at market rates, raising the price by Rs 9.25 a litre. Experts say 15-17 per cent of sales by the oil marketing companies (OMCs) are to bulk buyers.

Ghosh said with the increase, the government will save Rs 35,000 crore in 2013-14 and in case there is a complete decontrol of diesel, its savings will go up to Rs 70,000 crore.

However, others were sceptical. "Even as the ball passes into the OMCs' court, we are sceptical about the quantum and frequency of price increases," noted a report by Kotak Institutional Equities.

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