EVER since the United Front Government took the bold step of effecting one of the steepest hikes in petroleum product prices in recent years, speculation has been rife about the inflation that would result. Most experts predicted doomsday and declared that inflation level and prices would hit the roof. The spectre of double digit inflation suddenly hung over the economy.
Almost two months after the price hike, however, the general price level has not shown the dangerous upsurges predicted earlier. While inflation increased for four successive weeks from the time of the price hike announcement at an alarming rate, the rate of increase thereafter has been moderate. In eight weeks, inflation rose from 4.5 to 5.71 per cent for the week ended August 24. Experts predict a further slowing down in the coming weeks. The average rate of increase has been a modest 0.67 per cent in the last three weeks, while initially, it was increasing at almost 1.1 per cent every week. The slowdown started from the week ending August 3.
These movements appear to more or less bear out the predictions North Block had made at the time of the petroproduct price hike. While raising the prices, the Government had announced that the direct and indirect impact of a 25 to 30 per cent increase in the prices of petroleum products would push the inflation rate measured by the Wholesale Price Index (WPI)—the method currently employed by the Government—by 1 to 1.2 per cent only. At that time, this had seemed an extremely optimistic view on the matter.
So is it all hunky-dory on the inflation front? Well, not really. The actual impact due to the cascading effect, which could mess up the figures, will show only towards the end of the financial year. According to S.L. Rao, former Director General of the National Council for Applied Economic Research (NCAER), a study by the council had shown that a 10 per cent increase in the price of petrol and diesel normally leads to a 1 per cent increase in the infla-tion on the WPI basis, which meant that the 25 to 30 per cent increase in prices would necessarily lead to an increase of 2.5 to 3 per cent in WPI-led inflation. The actual impact on the Consumer Price Index could be even more which means that it could rise by up to 5 per cent.
The NCAER also worked out a Short Term Macro model on petroleum-led inflation which initially put the impact at 1.26 per cent to lead to a cascading impact to about 1.96 per cent but later revised its estimate to about 1 per cent immediate and 1.4 per cent by the end of the fiscal year 1996-97.
Apart from the petroleum product price hike, the other factor that will affect the inflation rate adversely, says economist D.H. Pai Panandikar, is the railway freight charge increase. This will affect prices across the board. Bill Clinton's missile attack on Iraq, too, could end up affecting prices due to the volatile relationship of the Indian price level with the international price of petrol and crude. With world crude prices shooting to a post-Gulf War high following the attack on Iraq, the net price of Indian oil imports would increase despite the fact that India usually has a comfortable price cushioning and a good inventory position.
Panandikar, like others, is of the opinion that while this is a relatively better period of the year, inflation is likely to go up towards the end of the year with the effect of increased procurement prices and the likely increase in electricity and coal prices adding their share to the increase in price level. Moreover, says Panandikar, if money supply increases drastically in the remaining months of the financial year, inflation would most certainly shoot up and might even cross 7 per cent. However, the spectre of a double digit inflation is still a far cry for India.
