Sonia Gandhi, head of the ruling Congress party and India's most powerful politician, backed the finance minister on Thursday, effectively signalling her support for a move to raise taxes on fuel, lawmakers said, according to Reuters. Backing from Gandhi, widely seen as running the government from behind the scenes, appears to show the government will not roll back the unpopular measure to help cut a 16-year-high fiscal deficit, despite opposition from her own coalition allies Highlighting the government challenges, truckers said they would raise freight rates citing higher fuel prices, a move that could exacerbate food price inflation. Truckers carry about 65 percent of all Indian goods. Food inflation accelerated slightly in late February, data released on Thursday showed, adding to pressure on the central bank to raise interest rates in its April policy review. But the government is reluctant to see higher interest rates for fear of choking growth. If growth slows, this will undermine the government's efforts to restore public finances and keep the deficit at 5.5 percent of GDP in 2010/11. A senior finance ministry official said factory-gate tax receipts, a key component of government revenues, would be flat on the year if the government did not get the estimated $5.7 billion from the increase in taxes on motor fuel. "We have many essential social obligations and to meet them it is necessary to raise resources," Gandhi told party lawmakers. Many lawmakers at the meeting told Reuters that it was clear from her statement she was backing the move to raise fuel prices. But inflation, and in particular spiralling food prices, presents a key challenge for the government. HIGHER FREIGHT COSTS The food price index rose 17.87 percent in the 12 months to Feb. 20 and the fuel price index was up 9.59 percent. Higher freight charges could lead to widespread protests. " ... A final decision on how much (hike) will be taken tomorrow," said Ramesh Kumar Gulati, Secretary of the All India Motor Transport Congress. "Maybe (it will be ) up to 15 percent." The government says inflation, seen as more of a supply side and distribution problem, would moderate once the winter-sown crop reaches the market by April. Prime Minister Manmohan Singh has said the government's decision to raise petrol prices by about 6 percent and diesel by 7.75 percent to help increase revenues may add 0.40 percent to the wholesale price inflation. There is no danger to the stability of the government on the issue, but a strong political opposition has fed speculation that the government may be forced to strike a messy compromise and partially roll back the move, particularly on diesel. High food prices coupled with a pick-up in manufacturing and fuel prices are expected to push the headline inflation to double-digits by end-March from 8.56 percent in January. Inflation in manufacturing picked up to 6.55 percent in January from about 5 percent in December, a sign inflationary pressures are spreading to other sectors of the economy. In January, the Reserve Bank of India surprised markets with a bigger-than-expected rise in banks' cash reserve requirements, but left the borrowing rates unchanged.
