NEW DELHI: The rate of inflation in India has galloped to a 13-year high to 11.05 per cent for the week ended June 7, confounding the worst fears of the United Progressive Alliance Government as general elections loom. This has been caused mainly by the June 5 increases in fuel prices and its cascading effect on all food commodities and other manufactured items, such as consumer durable goods and steel..
The unexpected spurt in the wholesale price index-based inflation from 8.75 per cent in the previous week evoked sharp criticism from all political parties, including the UPA’s coalition partners and Left allies, of the government’s failure to hold the price line and sustain the benefits of high growth.
Reserve Bank of India data show that the last time inflation was in double digits was in April-May 1995 when it ruled above 11 per cent.
Resignation demand
The Bharatiya Janata Party and the Left parties slammed the government. They sought Finance Minister P. Chidambaram’s exit for his “faulty” fiscal and other policy measures. These measures were a “total failure” in reining in inflation, they said.
Driven to the wall, the Congress, too, called for “hard steps” to contain the increase in prices even at the risk of lower economic growth.
While announcing the hike in fuel prices, the government had projected an inflationary fallout to the extent of 0.5 per cent to 0.6 per cent. Even as the complete lag effect of the fuel price decision is yet to become manifest, a seemingly dejected Mr. Chidambaram on Friday noted that a price spiral of this magnitude was anticipated when the government decided to increase fuel prices.
Holding out a promise to take stronger steps to douse inflationary expectations and hoping that the people would understand the government’s predicament, the Finance Minister said: “When the administered prices of petrol, diesel and LPG were increased, we had cautioned the Cabinet that inflation would touch double digit and that is what has happened. These are difficult times. The government is aware of difficulties... Naturally, we will have to look at stronger measures on demand and monetary sides and try to improve supply side also.”
Mr. Chidambaram did not elaborate on the inflation-control measures that are under consideration.
But the general apprehension is that of yet another bout of monetary policy tightening by the RBI — which could lead to increases in lending rates with respect to automobile, housing and consumer loans.
The effect of the price spurt was seen on the bourses on Friday. The BSE sensitive index (Sensex) tanked over 350 points in intra-day trading and sank further to close 517 points lower at 14,571.
All sectoral indices plummeted; banking shares were particularly mauled.
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