India faces an inflation-fiscal deficit trade-off as oil prices climb
Rising crude prices is posing an inflation-fiscal deficit trade-off to the policy makers. But given its priority to get the economy back on track post COVID, lower inflation is likely to get priority over higher fiscal deficit, according to a report by Barclays India.
Although at current levels, international oil prices are unlikely to pose a major challenge to India’s macro stability, India would have to manage the inflation/fiscal deficit trade-off as oil prices climb, Barclays said. ” As was the case during 2008-12, the government faces a large fiscal deficit and high retail inflation” said Rahul Bajoria, chief India economist at Barclays. “If oil prices climb significantly, the government may have to choose between fiscal stability and containing inflation”.
In the past two weeks, diesel prices have risen Rs 2.6/litter and gasoline prices Rs 1.6/litter, after a long period of no change in prices. The increase in prices is partly a reflection of higher crude oil prices, which have risen from Rs 37.46/barrel to $50.40/barrel since beginning of November.
