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At $135, oil set to put inflation on fire

business Updated: May 22, 2008 22:28 IST
Gaurav Choudhury

Global crude oil prices touched an all time high of over $135 per barrel, raising concerns in India about rising inflationary expectations, widening trade deficit through a higher oil import bill, a mounting subsidy bill and rapidly depreciating domestic currency.

The price of Indian basket of crude oil — the price at which Indian refiners buy crude oil — peaked a record $125 per barrel amid concerns that it could rise further.

Billionaire investor T Boone Pickens has predicted that crude oil prices could hit $150 a barrel in the next six months, while investment firm Goldman Sachs raised its forecast for the average price of crude oil for the second half of 2008 to $141 a barrel.

India, which imports about 70 per cent of its total crude requirement, faces the twin challenges of containing the import bill and maintaining retail fuel prices at reasonable levels.

Oil imports during April- March 2007-08 were valued at $77.03 billion, over 35 per cent higher than last year’s $56.94 billion. Non-oil imports in 2007-08 grew by 23.4 per cent to $158.9 billion.

Government-owned oil companies are losing about Rs 580 crore per day. In February, the government had raised the prices of petrol by Rs 2 and that of diesel by Re 1 a litre as part of its efforts to mitigate the spurt in global oil prices.

Analysts said the government has to do delicate tightrope walk between containing subsidy bill that has crossed the Rs 1,00,000 mark, maintaining profitability of oil companies and avoiding political backlash by executing a sharp rise in retail prices.

“The government has limited options,” said Delhi-based economist TK Bhaumik. “The silver lining, however, is it has a comfortable cushion in fiscal deficit that is budgeted at 2.5 per cent of GDP in 2008-09 and allows the leeway for raising the levels of subsidy to tide over the current crisis.”

Economists also said a rising oil import bill is one of the contributing factors for the slide in rupee in recent days, at least to the extent it widens the current account deficit.

Experts feel the rise in crude oil prices would exert inflationary pressures and widen the trade deficit. “It will surely have an inflationary pressure, more so in unregulated products such as aviation turbine fuel,” said DK Joshi, principal economist, Crisil. “Moreover, the import bill will go up and widen the trade deficit.”