The Hindu : FIXING INFLATION

Online edition of India's National Newspaper
Wednesday, Mar 31, 2004

Opinion

Opinion - Editorials

FIXING INFLATION

HIGH RATES OF inflation have cost many a government an election, but the National Democratic Alliance has nothing to fear on this count. The Centre has gone out of its way to moderate the rise in prices, even if this means consumers will have to pay when the new government assumes office in May. Inflation, as measured by the annual point-to-point change in the official Wholesale Price Index, threatened just a month ago to breach the 6 per cent mark. However, over the past four weeks there has been a substantial decline and with inflation standing at 4.8 per cent in the week ended March 13, it is fairly certain that the current fiscal will end with the rate close to the Reserve Bank of India's forecast of 4 to 4.5 per cent. Yet this is not the true rate of inflation for the Government has wielded its administrative powers to suppress the underlying rise in prices for fear of voter displeasure.

After deregulation of the administrative price mechanism in the petroleum sector, the oil companies have been revising rates every fortnight depending on the movements in the global market. Not during the past three months though. Global crude oil prices are estimated, in real terms, to have averaged at a higher level in the first quarter of 2004 than during any quarter after the spike of early 1980. However, the domestic prices of petrol and diesel have remained constant since late December 2003. The reason is simple: The Government has directed the public sector oil companies to hold their rates because a rising price graph could cost the NDA a significant loss of electoral support. If the declared policy of domestic oil prices tracking international trends had been adhered to, petrol and diesel would be more expensive by Rs.4 to 6 a litre. Since higher petroleum product prices have an all-round impact on the price level, a reasonable estimate is that inflation is now understated by at least two percentage points. This is the rate at which inflation shot up in early 2003 when global oil prices temporarily rose on the eve of the U.S. invasion of Iraq. Petrol cost Rs.5 more a litre in March 2003 and this pushed up the annual rate of inflation from 3.8 per cent in the first week of January 2003 to 6.4 per cent in the last week of March 2003. A similar acceleration would now be under way had the petroleum sector been allowed to set prices without fear of government intervention.

The financial burden on the public sector has already added up to Rs.3,500 crores. The forecasts are that the current hardening of international prices will continue; this means the companies will have to suffer losses for at least another six weeks — until the last phase of polling is completed in mid-May. When domestic rates are finally adjusted upwards and the oil companies compensated for being compelled to live for more than four months with a widening gap between domestic and global levels, consumers will be forced to put up with a huge price increase at one go. This is not the first time a government in New Delhi has manipulated domestic prices in order to advance its political ends. But what is galling in this case is the gap between what the NDA Government professes to do and what it actually practises. For a Government that claims it has set new standards in governance and whose political bosses lose no opportunity to expound on the merits of deregulation, the diktat to the public sector oil companies is a particularly cynical exercise of authority for electoral purposes.

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