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Resource centre on India's rural distress
 
 

RBI's policy dilemma

This week’s good news on food price inflation was evened out by the bad news on fuel prices hike. But, both were along expected lines. Thanks to the so-called “base effect” — the fact that last year this time food prices were rising sharply and since last year’s prices become the denominator in this year’s price ratio, the rate of inflation would be expected to moderate — and to an improved food availability situation, the wholesale price of food has come down. Compared to an inflation rate of 16.73 per cent for food prices in November 2009, the number in November 2010 was 9.4 per cent. However, there isn’t much comfort yet from getting into the single digits. Worryingly, few analysts see a sharp deceleration of food price inflation in foreseeable future. On account of the government’s pro-farmer minimum support prices policy and due to rising demand — and the two may well be related if rich farmers are spending more on food and food products — food prices are expected to remain buoyant. However, the long period of double-digit inflation in food prices may have come to an end for the immediate future. While a movement of terms of trade in favour of agriculture can benefit rich farmers, it hurts the poor and the salariat. Moreover, with global commodity prices rising and inadequate availability of buffer stocks, managing the food economy remains a challenge for India.

On the day the government released the more comforting food price data, state-run oil marketing companies indicated their decision to hike petrol prices, in an obviously calibrated move. This too was expected given the global firming up of oil prices. The government’s decision to get out of petrol pricing and allow oil marketing companies to take an economic view of the matter has helped India adjust more easily to global trends. The Indian basket of crude oil, which had averaged around $84.26 in November, has gone up to $88.47. It remains to be seen if the government has the political courage to also adjust diesel and kerosene prices up. If not, the gap between these different fuels will increase, making adulteration of petrol even more attractive. It is reported that presently Indian oil marketing companies are incurring a revenue loss of Rs 4.11 per litre of diesel on account of uneconomical pricing of the fuel. Given the recent surge in global oil prices, the subsidy burden on account of diesel pricing is estimated to be a whopping Rs 65,000 crore. The subsidy burden of uneconomically priced LPG and kerosene is expected to be Rs 53,000 crore.

India has followed a middle-of-the-road policy on petrol pricing. Petrol prices in India are neither as high as in more energy-conscious European countries, especially northern and western Europe, nor as low as in gas-guzzling United States and an assortment of oil exporting nations. The government must have the courage to continue to charge an economically and ecologically sustainable price for imported fossil fuels. Between rising energy prices and moderating food prices, India’s inflation rate remains above the long-term average of 8 per cent. So, the Reserve Bank of India finds itself on the cusp of a policy dilemma as it meets for a mid-quarter review of monetary policy.