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Sat, Nov 06, 2004 - Page 12 News List

Surge in inflation feared as India raises fuel prices

AFP , NEW DELHI

Indians were hit by higher fuel costs yesterday after the government raised domestic oil and cooking gas prices to offset a surge in global oil prices, a move seen stoking already high inflation.

The increase went into effect on Thursday at midnight after a government announcement.

The government had delayed such a move for fear of aggravating inflation, which is running at around 7.0 percent and denting economic growth in farm-dependent India where agricultural output has been hit by patchy monsoon rains.

"[The rise] is bound to be inflationary," said D.H. Pai Panandikar, economist at the New Delhi-based RPG think tank. "If we take the direct and indirect impact, inflation should go up by one percentage point."

Newspapers splashed the rise on their front pages. "Government bites the bullet, fires fuel and LPG prices," The Indian Express said.

India imports 70 percent of its crude oil needs and the central bank has warned high crude prices could deal a blow to economic demand.

Petroleum Minister Mani Shankar Aiyar told reporters the hike would bridge the gap between the price at which state-owned firms buy foreign oil and the level at which they sell to domestic consumers.

The price of a cooking gas cylinder went up immediately by 7.0 percent to 281 rupees (US$6) and another five rupees will be added each month until the price gap with the international price is erased.

Petrol prices were hiked by 5.0 percent to bring them in line with the imported price, while the price of diesel was increased 7.0 percent.

However, kerosene, used by millions of poor households for cooking, was spared any increase amid pressure from the Congress government's Marxist allies.

The government has been battling for weeks to keep a lid on domestic fuel prices but state oil firms, which control virtually all of India's gas stations, were being obliged to sell fuel below the import cost, creating big revenues losses.

This forced the government finally to go ahead with the hike, economists said.

It was the first change in petrol and diesel retail prices since the start of August even though crude oil prices have risen sharply since then.

Inflation hit a three-and-a-half year high of 8.32 percent in August but has come down to just over 7.0 percent.

An oil price hike usually has a cascading effect on prices of all goods.

Inflation stood at just 4.32 percent in April.

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