Mukherjee Says Food Inflation `Still Remains a Concern' in Annual Budget

India Food Inflation a Concern, Mukherjee Says in Budget Speech

Feb. 28 (Bloomberg) -- India's food inflation "remains a concern," Finance Minister Pranab Mukherjee said as he began unveiling a budget that economists predict will include measures to shield consumers from rising prices.

"The principal concern this year is continued high food prices," Mukherjee told parliament in New Delhi today in a speech that will outline tax and spending proposals for the financial year starting April 1. "The economy is back to pre- crisis growth trajectory."

The economy grew 8.2 percent last quarter, adding pressure on Prime Minister Manmohan Singh's government to join Hong Kong and Singapore in expanding benefits to help people cope with inflationary pressures. Stocks rose after Mukherjee said the government will give cash to the poor to buy kerosene.

"Price pressures are climbing in India," Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc., said before the GDP number was released. "The government is worried and will unveil steps in the budget to protect the poor."

Mukherjee may cut income tax and boost spending on food subsidies and rural jobs, Nomura Holdings and Goldman Sachs Group Inc. said.

The Bombay Stock Exchange's Sensitive Index, which has declined about 13 percent since Dec. 31, gained 1.3 percent as of 11:57 a.m. in Mumbai. The rupee was little changed, while the yield on the 8.08 percent bond due August 2022 dropped three basis points to 8.12 percent as of 11 a.m. in Mumbai.

Inflation Woes

India's benchmark wholesale-price inflation rate averaged 9.4 percent in the nine months through December, the most in the past decade, the finance ministry said in a report on Feb. 25. The price gauge rose 8.23 percent in January. Food inflation averaged 17.2 percent in the past year.

Singh's government faces five state elections this year and said last week that its "foremost" priority is to curb inflation, which reduces purchasing power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.

Thousands of workers from across India led by trade unions marched toward the country's parliament in New Delhi on Feb. 23, the fourth major rally in the capital in a year, protesting rising food prices, low wages and job insecurity.

Singh is also battling corruption allegations and on Feb. 22 agreed to a parliamentary probe into the sale of second- generation mobile-phone licenses, surrendering to three months of opposition demands that had derailed legislation and eroded investor confidence. The final parliament session of 2010 was the least productive in 25 years.

'Relief Measures'

"From a political management perspective, we expect the government to announce some relief measures for urban poor," said Chetan Ahya, a Singapore-based economist at Morgan Stanley. "There is a possibility that the finance minister announces reduction in income tax burden for the lower-income segment."

Mukherjee may raise the income-tax exemption limit from 160,000 rupees ($3,530) in the financial year starting April 1, and increase spending on the government's rural jobs program by 60 percent to 640 billion rupees, said Tushar Poddar, a Mumbai- based economist at Goldman Sachs. He said food subsidies may be increased as well.

Poddar also expects the government to step up its outlay on infrastructure including roads and power. The finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, which handle 65 percent of the nation's cargo, are plagued by single lanes and irregular surfaces, boosting the cost of goods and services.

Singapore's Plan

Singapore plans to spend S$6.6 billion ($5.2 billion) on benefits including tax cuts and rebates, the government said on Feb. 18. In Hong Kong, relief measures announced this month to help residents cope with inflation included an electricity subsidy and a waiver of property rates.

Mukherjee has room to maneuver in next year's budget because less bonds are due for repayment and the government in May earned 677.2 billion rupees from the sale of third- generation phone licenses to companies including Vodafone Group Plc, more than the budgeted 350 billion rupees.

The government needs to repay about 730 billion rupees in the coming fiscal year, compared with 1.12 trillion rupees in the 12 months through March, according to the finance ministry.

Asset Sales

India aims to raise 400 billion rupees from the sale of stakes in state-run companies, Mukherjee said. Proposed sales of stakes in Indian Oil Corp., the country's biggest refiner, and Steel Authority of India Ltd., its second-largest producer of the alloy, may help raise about 104 billion rupees next fiscal year, according to data compiled by Bloomberg.

Tax revenue is also getting a fillip as economic growth accelerates. Collections totaled 3.91 trillion rupees at the end of December, 73 percent of the target for the full financial year, government data show.

India's $1.3 trillion economy may expand by as much as 9.25 percent in the next financial year, the fastest pace since 2008, and inflation is "the dominant concern," the annual Economic Survey prepared by advisers to Mukherjee said on Feb. 25. The report said India needs to tighten its monetary and fiscal policies to check prices.

The Reserve Bank of India on Jan. 25 raised its benchmark repurchase rate for the seventh time in the past year to 6.5 percent and signaled more increases.

Budget Deficit

India's federal budget gap may narrow to 4.8 percent of gross domestic product in the year ending March 31, less than the earlier target of 5.5 percent of GDP, the finance ministry said in the Feb. 25 report.

The International Monetary Fund estimates India's national budget deficit, including state government finances, will be the highest among the so-called BRIC economies at 8.5 percent of GDP in 2011. That compares with 3.6 percent in Russia, 1.9 percent in China and 1.2 percent in Brazil.

Mukherjee may further withdraw fiscal stimulus by lifting the excise tax rate by two percentage points to 12 percent, said Rajeev Malik, Singapore-based economist at CLSA Asia Pacific Markets.

Companies including Maruti Suzuki India Ltd., the nation's biggest carmaker, said an increase in government levies will hurt profit, already squeezed by rising input costs.

"Higher excise taxes are going to impact the business sentiment in a big way and hurt the industry," Ajay Seth, chief financial officer at Maruti Suzuki, said in a Feb. 24 interview. "The relentless rise in commodity prices is putting significant pressure on margins."

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net