Raising the spectre of inflation for the first time after the Budget, Finance Minister Pranab Mukherjee admitted on Tuesday inflation was likely to reach the double-digit mark before cooling down.

He, however, assured of all possible steps, including the removal of supply bottlenecks, to tackle high food prices.

Replying to a question during the debate on the General Budget in the Rajya Sabha on Tuesday, Mukherjee said he was expecting a double-digit inflation rate in March itself. The general inflation was at 9.89 per cent in February.

Mukherjee explained that the inflation rate would now rise on low base effect. But analysts point out, by the government's own admission, there will be a 0.41-percentage-point addition to the inflation number in March due to the increase in cenvat rate in the Budget.

With the industrial growth, measured by the Index of Industrial Production, showing a double-digit upward movement for the fifth consecutive month in January, concerns of an economic slowdown are likely to give way to the rollback of an accommodative monetary policy.

The Reserve Bank of India [Get Quote] is expected to increase key policy rates in order to curb inflation.

"We expect the rate increasing cycle to begin at the April-20 policy meeting. We pencil in an increase of 150 basis point (bps) in repo and reverse repo rates and 75 bps in the cash reserve ratio between now and March 2011," said Nomura Holdings Economist Sonal Varma.

Refuting the Opposition's charge that the government was not releasing the buffer stock to ease the prices in the open market, Mukherjee said: "Already 3 million tonne of wheat and 1 million tonne of rice has been released. The states have been asked to pick up these stocks. If states ask for more, the Centre would provide that but we cannot throw it in the streets."

The finance minister also informed the House that Prime Minister Manmohan Singh would soon convene a meeting of the core committee, comprising chief ministers and Union ministers, to discuss further measures to tackle price rise.

The Rajya Sabha later passed the General Budget and sent it back to the Lok Sabha. The Finance Bill and other demands for grants will be taken up in the second half of the Budget session, when the Houses reconvene in mid-April.

Strongly defending the Budget announcement of raising duties on petrol and diesel, Mukherjee argued that even the states would benefit from this move. He calculated, of the additional revenue of Rs 26,000 crore (Rs 260 billion), almost Rs 8,000 crore (Rs 80 billion) would go to states.

"We could have taken the softer way of increasing the prices of petrol and diesel through administered price mechanism. That would have deprived the states of their share of taxes," he added.

The finance minister also backed his decision on fuel price in the context of goods and services tax, saying, this was an effort to bring the states on board before trying to introduce GST in April 2011.

"I wanted to show to the states I was practising what I was trying to preach. Should I not send a message to states to take them on board," he asked.

Referring to fiscal consolidation, Mukherjee said unlimited borrowing would affect India's financial credibility. He said: "Our fiscal credibility will be seriously challenged if we indulge in financial profligacy. It is not possible to live on unlimited borrowing."

Image: Pranab Mukherjee