New Delhi, March 31 - India on Monday scrapped import duties on crude edible oils and banned exports of non-basmati rice amid a raft of measures to stem rising inflation, which hit a 14-month high in mid-March and has alarmed policymakers.
Surging prices of essentials such as wheat, sugar, edible oils and steel have drawn howls of protest from the government's communist allies as well as the main opposition Hindu-nationalist Bharatiya Janata Party.
Many of the drivers -- rising demand in developing nations, severe weather, biofuel production, hot commodity markets -- are global, but for India's governing coalition the headaches are very much local with nearly a dozen states going to the polls this year and general elections due by May 2009.
After four hours of debate with ministerial colleagues, Finance Minister Palaniappan Chidambaram said import duty on all edible oil in crude form would be slashed to zero percent with immediate effect.
Duty on maize imports was cut to zero from 15 percent, while a ban on exports of pulses was extended for 12 months. All exports of non-basmati rice had to stop, the minister said.
While the cabinet committee on prices deferred a decision on tackling steel and iron ore prices as the steel minister was overseas, the minister cautioned firms not to hike rates.
"There are some reports that steel producers are planning to raise prices. I would on behalf of the government advise them to observe restraint," Chidambaram told reporters.
Hours before the ministers met, Central Bank Governor Y.V. Reddy told reporters in Mumbai that he was ready to act against what he described as "unacceptably" high inflation if necessary, but any steps needed careful thought.
LIMITED OPTIONS
Indian federal bond yields rose to their highest in more than five months on Monday on expectations a surge in inflation will lead to a monetary policy response from the central bank.
Before the latest fiscal moves, commentators said monetary policy tools could also work to an extent but tackling food price inflation required a long-term strategy while the politics demanded a quick fix.
"I think they have not realised the enormity of food price inflation. It affects landless labourers, the urban poor and the middle class," said political analyst Mahesh Rangarajan.
"For the Congress party, food price inflation could put a dampener on the farm loan waiver. It's a very serious issue."
The Congress party-led government made a $15 billion scheme to write off the debts of millions of small farmers the centrepiece of its budget presented late in February.
Chidambaram said on Friday the government was determined to take all measures including fiscal, monetary and supply side moves, to moderate inflation, and was ready to accept lower growth to trim prices.
Annual wholesale inflation -- the most widely watched measure -- jumped to 6.68 percent in mid March, largely driven by foods and manufactured product prices and economists expect it to remain high for a few months.
ALLIES PILE PRESSURE
The government's communist allies, who provide the government with a parliamentary majority from outside the coalition, on Sunday stepped up the pressure, setting an April 15 deadline for it to begin steps to bring down prices or face protests.
In recent weeks, the authorities had already cut import duty on palm oil, banned exports of edible oils, and scrapped tax refund schemes for exports of steel and cement.
Rice imports had been made cheaper through duty cuts and exports had already been severely curbed.
With polls looming and leftist allies on the attack while growth is already showing signs of moderating, analysts say the the government is likely to continue to use fiscal steps ahead.
"From a political perspective, food inflation matters more than non-food inflation to voters and the government is likely to continue resorting to fiscal measures, including increased subsidies to check food inflation," Rajeev Malik, analyst at JPMorgan, wrote in a recent research report.
"A hike in policy rates cannot be completely ruled out but the central bank is likely to favour tightening liquidity conditions before considering the option to hike rates."
The central bank has kept it repo rate, through which it infuses funds into the banking system, at 7.75 percent for the past 12 months, its highest rate since November 2002.