Inflation in India
In recent weeks, inflation in the Indian wholesale price index (WPI) has fallen to a two and a half year low of 3.4%. In the past, inflation in India has been volatile, and often structurally higher than current levels, as evidenced by the chart below. At first glance, present conditions appear benign relative to recent history: only one year ago, WPI inflation was running over 8%. In late July, the Reserve Bank of India decided to keep benchmark short-term rates unchanged at 5%, suggesting the central bank believes inflationary pressures are sufficiently contained.
(Graph: Inflation in India, wiggles between 11% and 1.5%)
Yet India’s favorable inflation readings belie a more complex story. Domestic prices are in part distorted by government policies that subsidize energy consumption. Indian oil refiners have been restricted from passing on the full increase in crude oil prices, especially in retail petrol and diesel markets. CLSA, an investment bank, estimates that India’s energy subsidies will cost domestic refiners $9.3 billion in lost revenues in fiscal year 2006. The government's policy has brought low inflation to India in the short run, but it has also introduced inefficiencies that may later prompt price volatility. However, India is not alone in this situation: Indonesia, Thailand and China have enacted energy subsidies during the last few years, and all are dealing with the challenge of unwinding these costly policies in the face of rising crude prices.
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Won't this have serious effects in the near future? Who will eat this cost of subsidization? |
