CRISIL: Even if oil prices average $100, inflation may remain below 6%

Even if crude oil prices average $100 per barrel in 2022-23, India’s retail inflation will be below 6%, according to rating firm Crisil, but rising costs will pose a significant risk to growth, especially while private spending remains weak.

Crisil estimates that if global crude prices are fully passed through to retail fuel costs in India, average consumer inflation will be 5.4 percent if oil prices average $85-90 a barrel, and 5.8 percent if the mean crude price is $100 a barrel over the next fiscal year.

Headline inflation, on the other hand, is predicted to be lower than it was the last time oil prices were above $100 a barrel in 2012-14, when food and core inflation was also high, according to Crisil, who added that such a scenario was unlikely to repeat in 2022-23.

CRISIL said inflation may be between 8-10%

“At the time, CPI inflation was between 8% and 10%… Inflation is expected to be lower this time due to decreased core and food inflation, which together account for 86 percent of the Consumer Price Index, according to Crisil’s India outlook study for 2022-23. 

The base impact from high petroleum product prices prior to the excise duty decreases proposed in November 2021 will also moderate fuel inflation, according to the agency. Core inflation, on the other hand, would remain sticky as firms sought to pass on higher input costs to clients, while services inflation would catch up following the normalization of activities, according to the report. It was pointed out that high inflation had disproportionately impacted the urban poor in recent years.

Despite the Ukraine-Russia conflict amplifying existing downside risks such as interest rate hikes in the United States, Crisil kept its growth forecast for the upcoming fiscal year at 7.8%. The agency proposed further fiscal policy support to stimulate consumption, noting that private consumption remained the weak link in India’s ‘nascent and uneven’ economic recovery from the pandemic.

“Although the stabilization of activity will help private spending in the coming fiscal,” said Crisil chief economist Dharmakirti Joshi, “we feel fiscal policy may need to be employed more aggressively than envisioned in the Union Budget.” “This may be accomplished by increasing funding for job-creating programs, offering food subsidies, and lowering petroleum-related duties,” he continued.

He said that financial support may provide a bridge for those most affected by the epidemic until the positive spillover effects of investment-led growth played out in the labor market and private consumption demand became self-sustaining. 

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