Price and Inflation!
The government of India made two important energy related decisions as they finally mustered enough courage to bite the bullet on delinking diesel prices. In the second significant decision, the government has decided to increase the price for natural gas which is likely to impact the retail inflation in the coming weeks. Inflation has been the biggest villain in the country’s financial markets with the Reserve Bank of India (RBI) clearly looking to dropping of inflation rates before announcing any cuts on the repo rate. While financial experts feel that deregulating of diesel prices is a good move as it frees the government from the subsidy it paid to the oil companies for selling diesel at below-market price. While linking the prices with the international markets, the increase in natural gas prices is likely to dent the current slow drop in inflation rates.
Consumer price index and energy reforms: Inflation is measured using the yardstick known as the consumer price index or CPI which is an estimation of price changes in a number of goods and services. The consumer price index based inflation which was hurting the average consumer with price rise of essential goods and services had slowly started to come down to acceptable levels. The consumer price index based inflation dropped to as low as 6.46 % last month which was its lowest since January 2012.
Now since diesel accounts for as little as 0.04% of the CPI, the decrease in diesel prices owing to deregulation of diesel by the government is likely to make an insignificant impact on the CPI index. With natural gas prices being increased, the raw material for all gas-based power plants is being made expensive that is likely to impact in the CPI resulting in an overall increase in the CPI figures starting in the next few weeks.
What it means for the common man: The increase in gas prices and the decrease in diesel prices owing to deregulation of diesel is likely to offer a bitter sweet experience for the common man. Since diesel is used as the fuel of choice for transporting majority of perishable and non perishable items including food and milk, the retail inflation is likely to witness a drop due to lower diesel prices.
The good news may just be limited as any good work in the drop of retail inflation by low diesel rates may be offset by the increase in natural gas rates that is the fuel for gas based energy generations plants across the country. The virtual no change or slight increase in the CPI inflation figures would mean a status quo of the RBI repo rates offering no decrease in EMIs and other retail loan interest rates for the near future.