Fuel price hike to push inflation into double-digit: PMEAC

Describing the government's decision to raise prices of diesel, cooking gas and kerosene as inevitable, the Prime Minister's economic advisor on Sunday said it would push inflation into the double-digit zone.

"Due to the hike, inflation could be close to 10 per cent by July," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said.

However, he added, the inflation numbers would subside after the initial surge. "I do expect that after initial correction, inflation will come down to 6.5 per cent by March 2012," Rangarajan said.

The decision to raise fuel prices, he said, was inevitable in view of the rising crude prices in the global market and its impact on the fiscal deficit. "Since correction was needed in order to contain fiscal deficit, the move is welcome."

On June 24, the government hiked the price of diesel by Rs 3/litre, kerosene by Rs 2/litre and cooking gas by a steep Rs 50/cylinder. This followed the hike of over Rs 5/litre on petrol announced by oil marketing companies in mid-May.

The overall inflation was 9.06 per cent in May, up from 8.66 per cent in April. The Reserve Bank had recently said that it expects inflationary pressure to remain high, at an average of 9 per cent till September on account of high global commodity prices.

The PMEAC chief's views found support from other experts and economists.

"Going ahead, the rate hike will adversely affect the inflation situation. While we expect inflation numbers in June to remain above 9 per cent, the real pinch would be felt in July when it may even touch double-digit," Deloitte, Haskin & Sells director Anis Chakravarty said.

He said while the impact on inflation is inevitable, the government did not have any other option but to hike the prices in light of huge under-recoveries.

The price hike would help the oil companies limit their revenue loss by Rs 21,000 crore, but they would still end the financial yeaer with about Rs 1.21 lakh crore of revenue loss.