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Fuel prices set to pinch wider

business Updated: May 15, 2011 21:56 IST
HT Correspondent

Brace yourself for a spell of high prices in the coming months.

The decision of oil companies on Saturday to raise prices of petrol by Rs 5 a litre and a possible hike in prices of diesel and cooking gas will pinch household budgets more, already pummeled by a bout of relentless rise in prices of most goods.

The average inflation in 2010-11 was 9.4% - the highest in 16 years. With no sign of let up, the government is worried.

The government expects the average annual inflation for 2011-12 to be between 7.5% and 8.0% amid spiraling prices in a slew of vital commodities such as oil.

High food and commodity prices are fanning prices of most manufactured goods. Even though food inflation is declining - it was 7.7% in latest reported week - high manufactured product prices remains a key concern.

Inflation of non-food articles has been in the range of 20-25% over the past many weeks.

Both the government and the Reserve Bank of India (RBI) have acknowledged that underlying inflationary pressures have accentuated, even as risks to growth are emerging.

High prices will also hurt the broader economy's expansion and the 9% gross domestic product (GDP) growth projected in the budget for 2011-12 appears increasingly unlikely.

"If oil prices continue to rise, it would be difficult to achieve higher GDP. GDP growth may come down to 8% from (the projected) 9%," a senior government official, who did not wish to be identified, said.

Last week, the RBI, in its annual policy review, pegged the real GDP growth rate for 2011-12 at 8% - down from the estimated 8.6% growth in 2010-11.

The central bank also raised the repo rate, the rate at which banks borrow from RBI, by 0.50%, to 7.25% to cool prices.

"The RBI's tightening will soften growth but have a less certain effect on slowing inflation owing to the impact of higher global commodity prices," said Rajeev Malik, senior economist, at broking and research firm CLSA Singapore.