Reuters | Tue Jul 20, 2010 | 2:20pm IST
India is looking to rejig its subsidy mechanism, Cabinet Secretary K.M. Chandrasekhar told reporters on Tuesday, indicating the government’s intent in slashing its fiscal deficit. India spent about $26 billion in food, fuel and fertiliser subsidies in the past fiscal year that ended in March, and a reduction in the subsidy bill will help it rein in fiscal deficit to the budgeted 5.5 percent level for the current year. New Delhi recently freed petroleum pricing from government control, and raised the prices of other fuels in a move to reduce its fuel subsidy burden. "We are looking at subsidies, how the subsidy system can be rejigged to ensure it reaches the poorest of the poor on one hand, and at the same time it incentivises production," Chandrasekhar said.
Monsoon rains, which are critical to cooling food prices, are likely to be normal to good this year, he said. Food inflation snapped a two-week easing trend in early July, reinforcing expectations for a 25-basis points hike in the central bank’s policy review next Tuesday. The weather office last week said monsoon rains, which irrigate 60 percent of the country’s farms, were 24 percent below normal in the week to July 14. The cabinet secretary, the highest ranked bureaucrat in the country, said he expects headline inflation to come down to between 5 to 6 percent by the end of this year.
The wholesale price index rose 10.55 percent in June from a year earlier, and what could concern policymakers the most was the pick-up in non-food manufacturing inflation that accelerated to 8.6 percent from 6.6 percent in May, suggesting broader inflation is becoming demand-driven. The Reserve Bank of India closely monitors movement in prices of non-food manufacturing items, which make up a little over half of the wholesale price index. The central bank had surprised markets on July 2 by lifting policy rates by a quarter point, its third hike this year, citing a rapid pick-up in non-food prices.