Govt needs to act on subsidies, supply shocks in food: RBI

Speaking to analysts today in a conference call after yesterday's policy review, RBI Governor D Subbarao also said because of the administered oil prices, the "necessary fiscal correction is not taking place".

Incidentally, his comments come on day P Chidambaram took charge as Finance Minister amid urgency to give a boost to the sagging economy. Known for taking tough and bold decisions, Chidambaram, in a minor cabinet reshuffle yesterday, was moved from Home to Finance Ministry.

"The role of the government is to generate the supply response. At least some of our inflation is coming from supply shocks in food, the government needs to address that... We believe that fiscal burden of subsidies is unsustainable and that some of this are getting structural in nature," he said.

The government's fiscal deficit touched 37 per cent of the budget estimates at Rs 1.90 lakh crore, as per the latest data of the Controller General of Accounts (CGA).

Diesel, domestic cooking gas (LPG) and kerosene prices remain under the government control and have not been raised since June 25 last year. Without a price hike, a staggering Rs 1,60,000 crore of losses on these fuel sales would have to be met by the government this fiscal.

With a high-powered ministerial panel on fuel pricing being scrapped, a cabinet committee may consider raising the prices of diesel, LPG and kerosene, Oil Minister S Jaipal Reddy indicated today in New Delhi.

Subbarao said there will be inflationary pressure one way or other, with administered prices or high fiscal deficit.

"If we correct prices, we will get the benefit of efficiency that comes from prices," he said.

Subbarao also said there are the infrastructure bottlenecks that the government has to meet and create the necessary conducive environment for investments.

In its first quarter monetary policy review, the RBI had kept key policy rates unchanged. It had also said there are more risks to inflationary pressures with deficient monsoon.