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'Higher oil prices, inflation may hurt economy'

Last updated on: May 30, 2011 17:56 IST

'Higher oil prices, inflation may hurt economy'

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Spiralling oil prices and higher inflation could hurt growth of the Indian economy, which is expected to expand nine per cent in the next fiscal, according to global consultancy Deloitte.

Noting that the country could 'well experience the effects of an oil-price shock,' Deloitte said that political instability in West Asia and a payment crisis with Iran are causes for concern.

". . .rising crude prices and a more generalised inflation threaten to derail the government's plan of achieving about 9 per cent growth in the next fiscal," it said in a report released on Monday.

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'Higher oil prices, inflation may hurt economy'

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Earlier this month, state-owned oil companies had hiked petrol prices by Rs 5 per litre.

Inflation stood at 8.66 per cent in April while food inflation rose to a one-month high of 8.55 per cent for the week ended May 14.

"If current inflation levels transform into inflation expectations as the new normal, the government and its agencies may face a challenge trying to rein in inflation without severely affecting growth," the report noted.

Recently, Finance Minister Pranab Mukherjee had said the Indian economy is expected to grow 8 per cent in 2011-12, which is lower than the budgetary estimate of 9 per cent growth.

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Reserve Bank of India has pegged gross domestic product growth at 8 per cent, citing high oil prices among other things as the reason for this moderation.

Deloitte said the central bank is likely to further raise rates in the coming months.

RBI has hiked interest rates eight times since March 2010.

"However, the efficacy of simply raising interest rates remains to be seen; monetary policy has to be exercised in tandem with the fiscal policy," it added.


Image: Strategic reserve is needed to moderate oil price volatility.
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