UPDATE 1-Inflation triggers tension in India ruling coalition

Wed Jan 12, 2011 4:56pm IST

* Congress scion Gandhi ruffles feathers in coalition

* Food inflation is straining coalition ties

* Food security bill seen delayed by a year

(Adds details)

By Krittivas Mukherjee

NEW DELHI, Jan 12 (Reuters) - Food inflation is fuelling tensions within India's ruling coalition, highlighting how high prices of basic foodstuffs have become a major voter issue ahead of state elections.

Food inflation, at a one-year high of 18.3 percent, is the highest of the major Asian economies, another headache for a government already battling multi-billion dollar corruption cases that have emboldened the opposition.

Rising prices of basic foodstuffs like onions could threaten the Congress party's chance in elections in states like West Bengal and Tamil Nadu that are key for Prime Minister Manmohan Singh's coalition to keep a majority in parliament.

The row broke out after Rahul Gandhi, family scion of India's most famous dynasty and a potential future prime minister for Congress, sought to blame the "compulsions" of a coalition government for the failure to control inflation and corruption.

The Nationalist Congress Party (NCP), a coalition partner led by Farm Minister Sharad Pawar, hit back on Wednesday, saying fighting inflation was a collective responsibility.

"His statement was unfortunate and not based on facts," said D.P. Tripathi, spokesman of the NCP. "We have seen in the 2004 and 2009 (general) elections that the people have given the mandate for coalition governments."

The row highlighted how some in Congress party feel frustrated that coalition partners have stymied reforms to pander to their regional voter interests.

The government is widely criticised to failing to implement reforms, like allowing foreign investment in multi-brand retail and modernising distribution networks, that would tackle the infrastructure bottlenecks that have helped keep inflation high.

The row does not threaten the ruling coalition but signals the lack of a cohesive policy response to deal with inflation.

The United Nations' food agency (FAO) said last week that global food prices hit a record high in December, topping 2008 levels when riots broke out in various countries. [ID:nLDE7041BM]

CUSHIONING INDIA'S POOR

Adding to the government's problems, a proposed food security bill may take at least a year to be finalised, delaying a possible vote-winning policy for Congress.

The proposal to widen subsidies of grains for the poor is seen hitting public finances but also easing voter ire against Congress ahead of state elections this year and the 2014 general election.

"There are policy and implementation issues on which we need clarity. There is also the issue of identifying the poor," the Financial Express quoted Naresh C. Saxena, a member of the National Advisory Council (NAC) which is drawing up the bill, as saying.

"There is crowding at the poverty line and hence, it might take one year in finalising the bill."

Wrangling over the scope of subsidies has stalled the food bill despite the backing of powerful Congress party chief Sonia Gandhi. Backers say it will protect over 400 million of India's poor, but critics say it will hit plans to cut the fiscal deficit.

The government is pushing for the law to subsidise grains to partly shield its voter base from surging inflation in a country where about 40 percent of the 1.2 billion population lives below the U.N.-estimated poverty line.

India already provides cheap grains and pulses to nearly 180 million poor or low-income families through a public distribution system that will cost nearly $12 billion in the year to end-March 2011, accounting for about 1 percent of GDP and 5 percent of total government spending.

The food security bill could nearly double the food subsidy bill to as much as $23 billion.

The NAC, headed by Sonia Gandhi, has suggested widening subsidies to 75 percent of the population. NAC is helping the government draft the bill.

The NAC wants the poorest of families to be given 35 kg (77 lbs) of rice at 6 U.S. cents a kg a month, while those a bit better off should be given 20 kg.

The government wants to bring down the fiscal deficit to 5.5 percent of GDP in the 2010/11 fiscal year from 6.9 percent the year before. (Editing by Alistair Scrutton)

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