Food Prices Up By 12.03% In August

New Delhi, Sept 18: India’s retail inflation rate crept back to double-digit level last month, as was in evidence in the surge in food prices, data released on Tuesday showed, underlining the upward pressure on prices that has restrained the central bank from cutting key policy rates to boost faltering economic growth.

The Consumer Price Index (CPI) rose 10.03 per cent in August compared with a year earlier and from 9.86 per cent in July, after the Reserve Bank of India kept its key rate unchanged for the third straight time.

Prices of vegetables (20.79 %), sugar (17.51 %), and protein products like pulses (16.04 %), eggs, fish and meat (11.54 %) and milk products (11.43 %) drove up retail price inflation last month.

In the urban areas, the CPI rose to 10.19 per cent during the month as compared to 10.10 per cent in July. The retail price rise in rural areas worked out to be 9.90 per cent during August up from 9.76 per cent in the previous month.

The CPI for August, however, did not capture the impact of hike in diesel price the government announced on September 13 to help the Oil Marketing Companies (OMCs) to reduce their under recoveries.

Data released earlier showed that the more widely tracked Wholesale Price Index rose 7.55 % in August compared with a year earlier and from 6.9 % in July.

On Monday, RBI cited persistent inflationary risk in keeping interest rates steady, while cutting the cash reserve ratio, or the proportion of deposits that banks must keep with the central bank, by a quarter of a percentage point. After cutting the repo rate, at which it lends overnight funds to commercial banks, by half a percentage point in April, RBI has resisted calls for further rate cuts.

Food inflation has remained high, partly due to expectations of weak monsoon rainfall, said, chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, said.

“By the middle of September we know that the monsoon is not as bad as it has been, and so the inflation expectation will come down in the coming weeks and months,” he told reporters.

That may not translate into lower inflation. The government last week increased diesel prices by Rs.5 a litre and capped the supply of subsidized cooking gas at six cylinders per household per year in a bid to reduce fuel subsidies and to bring down revenue loss to oil marketing companies that sell fuel at below production cost.

The diesel price increase is expected to have a 60 basis point impact on inflation in Asia’s third-largest economy. One basis point is 0.01 percentage point.

“I think what has been announced is almost the minimum that should be done under the circumstances,” Rangarajan said.

“Diesel in India still costs less than what it did in neighboring countries,” Planning Commission deputy chairman, Montek Singh Ahluwalia, said.

“If we still want to subsidize diesel prices, either health, education or other expenditure will have to be cut or the oil companies will not be able to invest in exploration and production. Also, if you keep prices low, there are no incentives for using energy efficiently,” Ahluwalia said.

The finance minister, P Chidambaram, has said the subsidy bill this year may rise to 2.4 % of gross domestic product (GDP) from the 1.9 % target set in the budget. The government has budgeted for a fiscal deficit of 5.1 % of GDP in the current financial year which it’s expected to overshoot.

Ahluwalia said that fiscal credibility was absolutely important.

“We recognize that the deficit is unsustainable and will take a three-four year period to bring down,” he said. “I am less interested in the current year than in the medium term: having a credible medium-term plan for reducing fiscal deficit is important.”

Observer Business Correspondent

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