The impact of the increase across the supply chain has the potential to hurt growth at a time when the economy was scripting a robust recovery after the bruising impact of the three Covid waves.
“Overall, we see incremental price pressures to the tune of 80-100 basis points (100bps = 1 percentage point) pushing average inflation in the range of 6. 1-6. 3% in FY21 compared to our estimate of 5. 3%,” said Yuvika Singhal, economist at research firm QuantEco.
Retail inflation has been above the central bank’s comfort level for the second consecutive month in February. It rose to an eight month high of 6. 1% in February while wholesale price inflation remained in double digits for the eleventh month in a row on the back of higher prices of manufactured products, crude petroleum and natural gas and primary non-food articles.
It is estimated that a $10 per barrel increase in the price of oil reduces growth by 0. 2-0. 3 percentage points, increases WPI inflation by about 1. 7 percentage points and worsens the CAD (current account deficit) by $9-10 billion. According to an estimate of the RBI, a 10% change in crude oil prices impacts retail inflation by 30bps. High global crude oil prices beyond $90 a barrel could lead to a revenue loss of Rs 95,000 crore to Rs 1 lakh crore in FY23, a report by the economic research wing of the country’s largest lender SBI has shown. Fitch Ratings on Tuesday revised their inflation forecasts for India upwards and said it sees inflation strengthening further, peaking above 7% in the third quarter of 2022, before gradually easing. The agency expects inflation to remain elevated throughout the forecast horizon, at 6. 1% annual average in 2021 and 5% in 2022.
Economists said the Centre may have to reduce excise duty further if Brent crude stays above the $90-per-barrel mark to cushion the impact on consumers and overall price pressures.
“While lower excise duty relative to last year will help moderate the impact of rising international crude oil prices, it will not be sufficient to lower fuel inflation if Brent prices stay above $90-per-barrel throughout the next fiscal year. In that case, the government may need to cut excise duties further to alleviate the burden on consumers,” said Dipti Deshpande, principal economist at ratings agency Crisil.