India’s inflation set to rise, says OECD

June 4th, 2008 - 7:13 pm ICT by IANS  

A file-photo of Manmohan Singh
By Dipankar De Sarkar
Paris, June 4 (IANS) Major expenditure items that are not shown in the published budget, including a pay award for government employees, are set to further increase the rate of inflation in India, the economic think tank for the world’s wealthiest nations said in a projection published Wednesday. Although the Indian economy is likely to continue expanding on a “strong albeit reduced growth path” there is a risk that the rate of inflation will not come down, the Organisation of Economic Cooperation and Development (OECD) said in its Economic Outlook for 2008 to end-2009.

The think tank’s report, which derived its risk assessment mainly from an analysis of what it called India’s “off-budget expenditures”, came on a day the Manmohan Singh government raised domestic and transport fuel prices by 9.5 to 11 percent.

The report said the official Indian estimate for the combined fiscal deficit of the union and states is projected to be 4.5 percent of gross domestic product (GDP) - well below the 6 percent target enshrined in the Fiscal and Budget Management Act.

“However, the published estimates of the budget do not account for two major expenditure items: subsidy payments to oil, food distribution and fertilizer companies (amounting to 0.7 percent of GDP in financial year 2007) and a pay award for public sector employees set by the Pay Commission that takes effect in FY 2008 (amounting to 0.9 percent of GDP on a full year basis),” the report said.

“Taking these two items into account, the fiscal deficit remains above 6 percent of GDP.

“Morever, the Pay Commission recommended backdating pay awards to January 2006, at a cost of 2.5 percent of GDP, and the government plans to write off the bank debt of small farmers, at a cost of 0.8 percent of GDP,” it added.

The OECD projection echoes concerns that have been voiced publicly by distinguished economists, including Professor Lord Meghnad Desai of the London School of Economics and Sudhir Kapadia of KPMG, the international accounting and consultancy firm.

The OECD - a grouping of the world’s 30 wealthiest countries - said the principal risk to its projection for India is that of inflation not moderating.

“This risk stems from the considerable boost to demand that would occur if the total Pay Commission award for government employees were to be paid out immediately. Quick action to write off small farmers’ debt would also add substantially to demand,” it said.

It placed the risk in the context where, in the absence of a marked fall in world oil prices, the government would have to raise petroleum prices.

“In such circumstances, inflationary expectations might deteriorate and the current account deficit widen,” the report said.

The report said Indian inflation has been driven by “soaring primary product prices” without the cushion of currency appreciation.

But the increase in the prices of non-primary products has been modest and “does not yet show signs of being affected by rising commodity prices,” it added.

India’s annual inflation rate has been soaring in recent weeks and reached 8.1 percent in the week ended May 17.

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