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Inflation to be 5% in FY06, but vulnerable to oil prices

Higher fuel prices was the main contributor to inflation this fiscal, followed by primary and manufactured products.

india Updated: Feb 27, 2006 15:02 IST

Optimistic of holding the price line at 5 per cent this fiscal, the Economic Survey cautioned that high and volatile global petroleum price could impart an "uncertainty" in the inflation outlook and could reflect on interest rates and investment in India.

"This inflation uncertainty, together with the unresolved global macro economic imbalances cast a shadow on the interest rate scenario. A continued firming up of global interest rate beyond a point poses the risk of dampening the domestic investment boom," the Survey presented in Parliament said.

It complimented the government for keeping the price line under check, although India suffered a 44 per cent increase in price of its imported crude oil.

"Given the sufficient foreign exchange reserves and government's commitment to further trade and tariff reforms, strict fiscal prudence, monetary discipline and orderly movement of the exchange rate of rupee, the annual inflation rates in terms of both wholesale and consumer price indices are likely to witness declining trends in the medium term and to remain within tolerable limits," it forecast.

It said the overall wholesale price rise in most part of 2005-06 remained below 5 per cent and is likely to remain around 5 per cent at the end of March 2006, thanks to sound macro-economic management along with effective management of supply and demand for essential items. WPI inflation averaged 6.5 per cent in the previous fiscal.

Higher fuel prices was the main contributor to inflation this fiscal, followed by primary and manufactured products.

The average price of Indian basket of crude petroleum shot up 44.5 per cent from $37.3 a barrel in April-November 2004 to $53.9 a barrel in the same period in 2005-06, forcing government to effect partial pass-through by hiking petrol and diesel prices twice in June and September 2005.

The low inflation in primary articles observed in the previous two years came to an end with supply shortfalls in some commodities like onion and potatoes and a firming up of demand for minerals.

Both wholesale and retail price rise in manufactured items slowed down this fiscal after the implementation of Value Added Tax and was under tight control with heightened competition in the increasingly liberalised markets.

Cement prices shot up due to spurt in construction activity while price rise in steel and sugar was moderate.

Maintaining price stability continued to be the main objective of the monetary policy as Reserve Bank hiked reverse repo three times by 0.25 per cent each to reach 5.5 per cent on January 24 while repo rate is pegged at 6.5 per cent.

Inflation-based on Consumer Price Index for Agricultural Labourers (CPI-AL) and Industrial Workers (CPI-IW) remained below WPI inflation till October 2005 due to cheaper food items which has a higher weight in CPI.

After inflation declined to 3.2 per cent and 3.4 per cent for CPI-AL and CPI-IW respectively between April-August 2005, retail prices revealed an upward trend as inflation in CPI-IW was 5.6 per cent in December.

The upward trend in consumer prices was mainly on account of hardening of retail prices of vegetables and pulses.

In April 2005, inflation for CPI-AL and CPI-IW was 3 per cent and 5 per cent respectively.

First Published: Feb 27, 2006 15:02 IST