Amid slowing growth and rising inflation, chief economic adviser (CEA) Arvind Subramanian on Friday met Prime Minister Narendra Modi to brief him on the state of the economy, including on issues like recent increases in domestic fuel prices. Petrol prices are hovering around their highest levels in three years, thanks to the current dynamic pricing system introduced since June under which fuel prices are revised on a daily basis. Retail inflation shot up almost one percentage point sequentially to 3.36% in August, while WPI inflation hit a four-month high of 3.24%, thanks to a pick-up in price pressure in food and fuel, GST and revised house rent allowances to central government staff.
As fuel prices rise further, along with a seasonal hardening of food prices and below-par monsoon, inflation is expected to rise in the coming months. The central bank has forecast higher retail inflation for the second half of this fiscal (3.5-4.5% against 2-3.5% for the first half). Latest data revealed pre-GST disruptions and the lagged effect of demonetisation pulled down the GDP growth in Q1, FY18 to a three-year low of 5.7%, with private consumption — a major driver of growth in recent years — losing sheen. Industrial output reversed a contraction in August, but the growth was a meagre 1.2%.
Although global oil prices are ruling much lower than three years ago, lack of subsidy (prevalent during the UPA era) and high excise duties have kept petrol and diesel prices at elevated levels, leaving consumers dissatisfied. Petrol and diesel prices in Delhi were at Rs 70.43 and Rs 58.80 per litre, respectively, on Friday. For its part, though, the government has used higher taxes to boost capital spending to partly offset a slowdown in private investments.
Petroleum minister Dharmendra Pradhan on Friday tweeted that while international crude oil prices have gone up 13% in the past three months, diesel prices in India have risen only 4%. He has remained non-committal on any sort of market intervention to offer relief to consumers.
Last month, the Economic Survey (Volume-II) for 2016-17 said India was possibly entering a phase of low inflation for the first time since 2005, aided by structural caps to price pressure in food and fuel. While good farm production and resilience to erratic monsoon would help keep a lid on food prices, the rise of shale oil and gas technology has cut costs and driven up output globally.
The survey also pointed out that the central bank had overestimated inflation by more than 100 basis points in six of the past 14 quarters (three in 2014 and three in the most recent period) with an average error of 180 basis points.