Of global oil prices, markets and inflation

In addition to oil prices, the food and commodities basket has caused serious concern not only to the government but also to individual households where monthly budgets have gone for a toss.

Fridays have come to be hated by the Government, especially Finance Minister P. Chidambaram and the economic ministries as well as the Reserve Bank of India (RBI), which have to deal with the galloping inflation in the economy.

When the inflation levels were in the 6-7 per cent range, the government and its spokespersons held out the hope that it can be contained and gradually brought down to manageable levels — 4-5 per cent perhaps. But none of them bargained for the kind of rise in the world oil prices, which continue an unrelenting increase almost every day. Oil prices have already breached the $146 a barrel mark, and economists as well as speculators warn that it could climb to the $170 level before year-end.

Influential factor

Though there are several other factors that have aided inflation, Finance ministry officials point to the oil prices being the single most influential factor that has impacted severely on the figures.

In the charts published alongside, the relative numbers of Sensex — the Bombay Stock Exchange’s benchmark — the value of the Indian rupee in relation to the American dollar, the price of standard gold in the Indian market, and the world crude prices from April have been mapped. They offer an interesting study on the economy, the financial markets, and the commodities too — which ultimately reflect on growth and inflation.

There has been a steady and significant increase in global oil prices which have spiralled from just $101.15 a barrel on April 1 to over $145 now. Along with it, the price of the yellow metal, gold, has also risen, after an initial fall. The value of the rupee has fallen against the dollar, which has lost its shine in the current market. Bombarded by these factors, the BSE stock index continues to take a beating — its 700-point rise last Wednesday may have been a flash in the pan. After almost touching the 20000-level earlier, the Sensex was still above the 15000-mark on April 1 and even rose to test the 18000-level by the beginning of May. But after that, it has been a free fall.

Viewed in the vortex of these changes, the inflation figures have risen from week to week. For the week ending May 24 it was 8.24 per cent, going up to 8.75 per cent till May 31, entering double-digit inflation by June 7 (11.05 per cent) and still rising — to 11.42 per cent by June 14 and 11.63 per cent by June 21. Even the Finance Ministry expects it to inch its way up to 13 per cent over the next couple of weeks. The cut off date to consider the galloping nature of inflation in the country now should be June 4, when the government revised upwards the prices of petroleum products — petrol by Rs. 5 a litre, diesel by Rs. 2 a litre, and LPG by Rs. 50 a cylinder. Many State governments offered some relief in sales tax and VAT, while the Centre itself lowered the duty and levies on these products.

Cascading effect

Since most political parties have moved into election mode, the government may not be in a position to raise the prices of petrol and diesel again till the elections. Petroleum Secretary M. S. Srinivasan has hinted at a review of the prices in October, whatever that means. But that steep increase has had a cascading influence on prices and consequently on the economy. On top of all this came the strike by the truckers, which almost paralysed the movement of goods in the country for three days.

Mr. Chidambaram has conceded that the inflation figures are not going to come down over the next several weeks, perhaps months. In addition to oil prices, the food and commodities basket has caused serious concern not only to the government, but also to individual households, where monthly budgets have gone for a toss. As Deeptika, a social worker and homemaker says: “Newton’s law does not apply here. Prices that go up seldom come down. Let’s hope they stabilise sometime soon and we have a situation of plenty, so that prices do come down.”

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