Inflation may stay below 6% even if oil averages $100: Crisil

India’s retail inflation may average below 6% even if crude oil prices average $100 a barrel in 2022-23, but rising prices remain an elevated risk to growth especially as private consumption remains subdued, rating firm Crisil said on Thursday.

Assuming a full pass-through of global crude prices to retail fuel prices in India, Crisil expects average consumer inflation to be 5.4% if oil prices average $85-90 a barrel, and rise to 5.8% if the mean crude price is at $100 a barrel through the next fiscal year.

Headline inflation, however, is expected to be lower than the last time oil prices shot past $100 a barrel during 2012-14, a period when food and core inflation were also high, Crisil observed, adding that such a scenario was unlikely to repeat in 2022-23.

“At that point, CPI inflation was in the 8-10% range… This time, inflation is likely to be lower because of lower core and food inflation, which together have 86% weight in the Consumer Price Index,” Crisil said in its India outlook report for 2022-23.

Fuel inflation would also moderate, due to the base effect from high petroleum product prices preceding the excise duty cuts announced in November 2021, the agency noted. It, however, warned that core inflation would remain sticky as firms would look to pass on higher input costs to customers, and services inflation would catch up following the normalisation of activities. The urban poor, it noted, had been worst hit by high inflation in recent years.

Crisil retained its growth estimate for next fiscal at 7.8% despite the Ukraine-Russia conflict multiplying existing downside risks such as interest rate increases in the U.S. Noting that private consumption remained the weak link in India’s ‘nascent and uneven’ economic recovery from the pandemic, the agency mooted more fiscal policy support to boost consumption.

“Although private consumption will receive some support from normalisation of activity in the coming fiscal, we believe fiscal policy may need to be deployed more aggressively than envisaged in the Union Budget,” said Crisil chief economist Dharmakirti Joshi. “This can be done via increasing allocation for employment generating schemes, providing subsidy on food, and cutting duties on petroleum products,” he added.

Fiscal support could create a bridge for those impacted the most by the pandemic till positive spill-over effects of investment-led growth played out in the labour market and private consumption demand became self-sustaining, he added.