Postponing the hike in fuel prices, which effectively acts as a tax on consumption, the government has ducked the bullet both on political and economic front.
Analysts opine an upward revision of 10 percentage points in fuel prices, as many expected, would have lead to several tens of basis points fall in growth projections of the country in the current fiscal.It would also have pushed up the head line inflation by more than 50 basis points.
With state election round the corner, Congress?s main allies Trinamool Congress and DMK wouldn?t want to be held accountable by common man who is feeling the pinch of high prices. India?s annual inflation, which is way above central bank?s comfort zone, would have seen an above 35 bps spike in June if the first round impact of 10% hike in fuel price sets in. Petrol and diesel have a weight of 2.9% in the headline inflation index. Although it is too early to assess the second round impact as the ability of manufacturers and transporters to pass on this hike in rates is not yet clear, it could have amounted to another 20 basis points. The central bank, that is hard pressed to target inflation, will be left with no choice but to accelerate the normalisation of monetary policy.
Although the headline inflation for the month of March is already at 9.59%, the central bank has not gone for aggressive moves towards policy normalisation on account of the euro zone crisis and the risks it poses for global economy. ?If it wasn?t for the uncertainties posed by the euro zone crisis we would have seen another 25-50 basis point hike in key rates in last month itself,? said Jehangir Aziz, chief economist at global financial services firm J P Morgan.By deferring the hike in fuel prices union government has bought more time for central bank to normalise the policy rates.
?A hike in fuel price will naturally have a depressing effect on consumption while the reported measure of inflation will see an uptick,? pointed out country?s chief statistician Pronab Sen. Although the growth stands to suffer in short term with the money that was used for subsidies getting diverted to productive ends the economy will stand to gain in the long run, he added.
The government has not made any provisions for compensating the oil companies in Budget for the current financial year. With 3G auction bringing in windfall gains, the government has a little elbow room in plugging deficit slippages. The euro zone crisis and tepid global economic growth that is keeping a check on crude prices also gives the government more time to decide on the spike in prices.
Plan panel member Saumitra Chaudhuri told FE that, ?Having a rational price structure is developmental in nature and is neither contractionary or expansionary.? Chaudhuri was a member of the Chaturvedi Committee which recommended rationalisation of fuel prices.