Inflation spurts as fuel price hike looms

India's inflation, based on the Wholesale Price index (WPI), climbed further in the third week of May even as the Government remained in a soup over high crude oil prices and its adverse impact on public sector oil marketing companies. The annual point-to-point inflation rose to 8.1% in the week ended May 17 from 7.82% in the previous week, the Commerce & Industry Ministry said. Economists had expected a reading of 7.95-8%. Meanwhile, the Government revised the inflation rate for the week ended March 22, to 7.85% from the provisional forecast of 7%. Inflation may accelerate further as the Government may revise preliminary estimate in two months. Also, with the Government almost making up its mind on effecting a small hike in fuel prices, inflation is bound to go up.

The impending fuel price hike was postponed till the weekend. Prime Minister Dr Manmohan Singh finalised details of the package to bail out public sector oil marketing companies (OMCs), who are suffering due to surging crude oil prices. The Prime Minister discussed the issue with External Affairs Minister Pranab Mukherjee, Finance Minister P Chidambaram, Petroleum Minister Murli Deora and Planning Commission Deputy Chairman Montek Singh Ahluwalia. "We discussed the various options... hopefully, by tomorrow or by day after tomorrow, we will have a solution," Deora told reporters on May 29 after two rounds of talks with the Prime Minister.

Though Deora refused to say what transpired in the meetings, reports suggested that a combination of a hike in petrol and diesel prices along with a minor duty rationalisation and according SLR status to oil bonds could form part of the package. It would be a climb down from the proposed increase of Rs10 a litre in petrol, Rs5 per litre in diesel and Rs50 per LPG cylinder sought by the Petroleum Ministry, along with a cut in customs duty on crude oil and lower excise duty.

"International prices touching US$135 a barrel has forced down our throat Rs2.25 trillion revenue loss on the sale of petrol, diesel, LPG and kerosene. Unless we act, companies will not be left with cash to import crude," Deora said. "The Prime Minister and Finance Minister saw papers of projected revenue loss and options thereof. They realise very much that we need to help PSU oil firms on a war footing," he said.

Meanwhile, there was some relief for the bleeding oil PSUs as the Reserve Bank of India (RBI) came to their rescue. The central bank allowed banks to lend more money to them. The central bank told banks they can lend up to 25% of their capital funds to the cash-starved state-run oil marketing companies as against 20% earlier. This limit can be increased to 30% on board approval.