How big will the inflation pain be?

Inflation is perhaps the biggest uncertainty in the new fiscal year. When the ministry of finance presented its Economic Survey on January 31, 2022, it assumed that crude oil prices will remain in the range of $70-75 per barrel. The average price of India’s crude oil basket (COB) has been $97.1 and $108.7 in January and February 2022 and the number is expected to be much higher in March. While India is expecting to mitigate some of the crude price hike by sourcing cheaper oil from Russia (much will depend on the volume), a prolonged period of high crude prices is likely to upset the budgetary math of the government and also eat into purchasing power of the common people.

To be sure, the government is still hopeful that price pressures will weaken sooner rather than later. “The impact (of high crude prices) will depend not only on the level of oil price but also on its persistence. We must remember that the new financial year hasn’t yet started. It is possible that oil prices will settle down in a range that is tolerable for us,” chief economic adviser (CEA) V Anantha Nageswaran told Bloomberg Quint in an interview on March 30.

While a future decline in prices is in the realm of uncertainty, managing inflation expectations is going to be a difficult challenge for policymakers. Not only are inflation expectation levels of households significantly higher than their historic standards, the sharp increase in fuel prices after the end of the assembly election cycle – the prices of petrol and diesel in Delhi have increased by ₹6.4 per litre between March 23 and March 31 – is likely to lead to further increase in the inflation expectations of households.