Chidambaram - sorry, I am clueless

The government on Friday conceded that it could do little to tame inflation that has already breached the 8 per cent mark on the back of a persistent rise in global commodity prices.

"There is yet no sign of a decline in the inflation rate. We do not know if we have peaked yet," Finance Minister P Chidambaram said, after latest price data showed the provisional rate of inflation for the week ended May 17 stood at 8.1 per cent, up from 7.8 per cent a week earlier.

The minister’s comments contrast his earlier stance a couple of weeks of ago when he said that the inflation rate could already be tapering off.

Worse, actual estimates that follow with a time lag have been turning out to be much higher, and going by the trend so far, the inflation rate might have already crossed 9 per cent.

The spike in prices not only squeezes people’s real incomes, but for million of middle class Indians it points to increased financial hardship as a rising inflation rate forces interest rates to move up and add to the repayment burden on their housing and other consumer loans.

The inflation numbers overshadowed news that the Indian economy grew faster than the government’s own forecast for the fiscal year ended March 2008. Latest government statistics on national income showed the gross domestic product grew 9 per cent — compared with an earlier forecast of 8.7 per cent — helped by robust growth in agriculture.

The GDP numbers, however, pointed to a sharper slowdown in manufacturing that has been hemmed by hardening interest rates.

Chidambaram described the price situation as worrisome and attributed a part of it to persistent rise in global crude prices, which are hovering over $130 a barrel.

Pressure is mounting on the government to revise retail prices of petrol, diesel and LPG, currently sold at highly subsidized rates — a practice threatening to bankrupt state-owned oil firms. The government is debating how to protect oil firms, while minimising the impact of any price rise on consumers.

The impact of any hike in retail fuel prices will have impact going beyond the inflation rate. "Higher oil prices look set to weaken growth by squeezing profits, widening trade deficit and reducing consumer purchasing power as a result of higher inflation," said Sonal Varma, analyst at Lehman Brothers.

via HT