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Drought-related costs to add to pressure

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Faced with the adverse effect of deficient rains, the government might have to spend extra money on drought relief, putting further pressure on the already precarious fiscal situation, according to the Reserve Bank of India (RBI).

Speaking to reporters, after releasing the first quarter review of 2012-13, Chairman said this season’s deficient and uneven would also have an adverse impact on food inflation. In the April policy, RBI had expected a normal monsoon and improvement in industrial activity. None of the expectations have become reality, though.

RBI said the latest information (till July 26) showed the southwest monsoon had now covered the entire country, but the cumulative rainfall was still 21 per cent below the long period average. Deficient rain will affect kharif crops, particularly coarse cereals and pulses, and shoot up food prices. The country is already reeling under high food inflation, which rose to 10.81 per cent in June from 10.74 per cent in May.

In the 2012-13 Budget, the government had targeted to reduce its fiscal deficit to 5.1 per cent of gross domestic product (GDP) from an estimated 5.9 per cent in 2011-12. The government also aims to keep subsidies under two per cent of GDP in 2012-13 and to further cut it to 1.75 per cent in the next three years.

The high fiscal deficit is predominantly from huge subsidy bills for petroleum products and food. During April-May, food subsidies were lower, but fertiliser subsidies were more than twice the previous year’s level.

Subbarao said tangible and credible actions on the deficit front were necessary. “The government has set the target of restricting the subsidies bill to below two per cent of GDP in 2012-13. If it is to be achieved, the immediate action on fuel and fertiliser subsidies will be required,” RBI said.

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