Fuels: Fuelling to Inflation


By

Prahlad Kumar Pandey
Faculty Member
INC
Rewa (MP)
 


The finance minister has shown government's inability to control the prices of petrol.1

The prices of crude oil have shot up more than three fold in the past four year from $ 34 to $ 110 per barrel. Similarly the price of palm oil in the international market has increased from $ 471 to $ 1300 during the same period.

The inflation, ended on March 22, has touched the 7% mark. The inflation is calculated considering the average whole sale price of 435 products and commodities. The whole sale price for these commodities is collected from various sources on weekly basis. Each item of the basket is given certain weight depending upon its traded volume in the economy. The basket is divided into three major groups namely (i) Primary Articles, (ii) Fuels, Power, Light and Lubricants and (iii) Manufactured Products. These groups are given weights 22%, 14% and 64% respectively. What it implies is that overall impact on the WPI will depend on two things, percentage increase in the whole sale price of the commodity and its corresponding weight.

Fuels, be it for man or machine, are the basic needs without which dynamic life cannot be imagined. Petroleum products are the life blood of all modern and industrialized economies of the world including India. As a healthy human body requires regular and pure circulation of blood in all the organs, likewise all economies require adequate availability of fuels at reasonable prices.  It is worth noting that the prices of petroleum products have skyrocketed to more than three times in the past four years.

Inflation rate at 7% is a cause of concern. The causes and remedies of this inflation have to be thought over and then corrective measures to be taken up.   When examined these figures closely, we come to know this inflation is the result of sharp increase in the prices of fuels. The term fuel is used here in broader sense.  Fuels means raw and manufactured food articles for people like food grains, edible oil, etc. Fuels also means conventional and non conventional energy sources like petrol, diesel, coal, electricity, etc.

The weight given to fuel group is 14.23%. The weight given to raw food articles is 15.40% and manufactured food products have been given a weight of 11. 53%. Hence, fuels 9 for man and machine both) are more than forty percent responsible for increase or decrease in the inflation rate. The fruits, food grains and vegetables have become dearer by 3.33%, 6.16% and 11.47% respectively. The manufactured food products like Ghee and biscuit have got costlier by 8.5%. The prices of edible oils and oilseeds have shot up by 20.9% and 21.5% respectively. The fuels like petrol, diesel, etc, have become dearer by 6.69%. Last but not the least, the price of iron ore has reached to seventh heaven registering 53.56% price hike.

The price hike of petrol and diesel in mid February seems to have been showing its color now. The fruits and vegetables are transported very frequently causing high selling price. Hike in petrol and diesel prices has spurred the high transportation costs for all commodities including fruits and vegetables.  Ironically, WPI is based only on commodities and not on services in an economy where 55% of the GDP comes from service sector.

The step taken by government to tame the inflation are inadequate and the result of poor foresight. Banning the non basmati rice, allowing duty free imports of edible oil and treating profiteers and hoarders strictly are some o the actions taken. Major steel manufacturer have also decreased the prices of steel to the maximum limit of Rs. 2000/tonne. The pills government has swallow to cure inflation will show its impact only after a fortnight. Moreover, the affectivity of these short term corrective step is questionable. According to the estimates the food grain production is likely to be approximately equal to what it was in the previous year. The prices of vegetables and fruits are normally high in the summer season. It is difficult, in the light of the experience that the half percent increase in CRR in 2006 had driven away Rs 13000 Crore from the market, to say how effective monetary measures would be. The expansion of NREGA will pump Rs 16000 crore in the pockets of rural workers. The increase in the minimum limit of income tax is likely to benefit 32 million tax payers with a minimum of Rs 4000 and a maximum of Rs. 44000. The loan waivers of Rs 60000 crore have relaxed the small and marginal farmers. Following the recommendations of sixth central pay commission is both the political compulsion and moral duty of the government. It means employees' pockets would be warm by Rs 30000 crore in the form of arrears and salary hike. Sensex, by dipping down to 496 point in the wake of the monetary measures, has added salt to the injury.

The million dollar question before the government is if it wants to go to the courts of voters with a proud and robust economic growth or with defending mode on inflation issue. For achieving both simultaneously seem to be a distant possibility.

References

1. http://www.commodityonline.com/news/topstory/newsdetails.php?id=6620

2. http://eaindustry.nic.in/
 


Prahlad Kumar Pandey
Faculty Member
INC
Rewa (MP)
 

Source: E-mail April 22, 2008

          

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