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Updated: March 2, 2011 22:33 IST

Oil prices uncertain factor in economic management

Special Correspondent
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Prime Minister’s Economic Advisory Council chairman C. Rangarajan.
Prime Minister’s Economic Advisory Council chairman C. Rangarajan.

Even as high food inflation at 11.49 per cent, though on a downward trend, remains a major concern and the government is devising various ways of reining in the price spiral, the uncertain factor is the volatility in crude oil prices in global markets.

While Prime Minister's Economic Advisory Council Chairman C. Rangarajan on Wednesday held out an assurance that the government would take all monetary and fiscal measures necessary to bring down headline inflation [from 8.23 per cent in January] to the comfort zone of 4 to 5 per cent, the Reserve Bank pointed out that rising crude oil and commodity prices could derail such efforts.

Stressing at a conference here that all policy instruments would have to be activated to douse inflationary pressures, Dr. Rangarajan said: “The policy is towards control of inflation, taking inflation lower down in the range of 4 to 5 per cent. We will use all policy instruments available, state policy instruments, direct intervention in grain market, as well as fiscal and monetary policy.”

Major risk

According to RBI Deputy Governor Subir Gokarn, the deciding factor in controlling inflation would be the trend in oil and commodity prices. Pointing out that energy prices are a major risk at present, he said: “It [inflation] is moving downwards, [that] is a reflection of our monetary actions. But the risk of it turning around [is] because of energy and food… we cannot predict how high the oil prices will go or where it will stabilise.”

Clarifying what high global crude oil prices would mean for the economy, Chief Economic Advisor Kaushik Basu pointed to two options — the government may either be forced to raise diesel and cooking fuel (LPG) prices or to absorb the price hike and shell out more on oil subsidy. In either case, it would be a tough choice for the government as the country imports 75 per cent of its total crude oil requirements.

“In such circumstances [if oil price rise is significant], the government will either have to bear the additional cost or pass it on to the consumer.

“However, in such a case either decision would be difficult…If crude prices goes up sufficiently high, then so does our calculations on subsidies,” he said.

Incidentally, the budget for 2011-12 has estimated Rs.23,640 crore in oil subsidy as compared to Rs.38,386 crore for the current fiscal.

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