The Hindu Business Line : Inflation warning

Inflation is currently under 4 per cent but a hike in energy prices can change the benign sentiment. And the government’s options are rather limited.

Oil prices have hit an all-time high of $82 a barrel. To many in the market, this was not unexpected, as the demand-supply situation is getting tighter, more so with the approaching winter season in the northern hemisphere. Robust increase in demand, particularly in Asia, is not adequately matched by higher supplies. With slower inventory building and scarce non-OPEC supplies, OPEC’s announced output increase of 500,000 barrels a day beginning November 1 seems far f rom sufficient to rebalance the market. Huge speculative interest further boosts spot and forward prices somewhat artificially. In this background, there is reasonable expectation that oil prices will stay firm and consolidate around the recent high levels (around $80 a barrel).

With persisting uncertainty over the wider impact of the currency crisis and the less-than-encouraging outlook for global growth, soaring oil prices are sure to be a cause for serious concern, especially for import-dependent economies such as India. Interestingly, the International Energy Agency said recently that high oil prices were likely to have little impact in slowing the growth in Asian demand, with strong import growth expected in both China and India. But the Indian market cannot remain insulated from global influences. Talk of the government having to raise petrol and diesel prices has begun to do the rounds of the market. In agricultural commodities, there seems no respite from the prevailing bullish sentiment because of the burgeoning bio-fuels sector. Prices of wheat, corn and soyabean are at, or near, record highs.

According to the Finance Ministry, inflation is currently under 4 per cent. Prospects of the Kharif crop harvest and supply pressures would most likely put a lid on food prices, at least until mid-November. A hike in energy prices can potentially change the current benign sentiment; but the government’s options are rather limited. Concerns in the US are different from those in India. The Fed rate cut is intended to reverse the threat of an economic slowdown, while in our country inflation — and measures to control price rise — is the major issue. It may be tempting to allow the rupee to strengthen further as much of our inflation is ‘imported’ — the fallout of high international prices of energy and food products. But policy-makers will have to reckon with exporters who are already rather peeved with the 8 per cent gain the rupee made in recent months. The last quarter of 2007 and the first quarter of 2008 are likely to severely test the government’s ability to respond to inflationary tendencies. A critical factor to reckon with would be the changing political landscape and the creeping possibility of a general election in a matter of months.

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