* Central bank governor: tackling inflation a priority
* Finance minister reiterates pledge of fiscal discipline
* Trade deficit narrows; gold, oil imports slump
(Updates with RBI Governor comments in the afternoon)
By Manoj Kumar and Suvashree Dey Choudhury
NEW DELHI/KOLKATA, Dec 11 (Reuters) - Tackling inflation
will be a priority, India's finance minister and central bank
governor said on Wednesday, after high prices contributed to
painful losses for the ruling Congress Party in state elections.
Finance Minister P. Chidambaram also reiterated promises of
budget discipline as investors worry the Congress-led minority
coalition will boost spending to improve its standing before
general elections due in May.
Data on Thursday is expected to show consumer prices were up
10 percent in November from a year earlier, with wholesale
prices due out on Monday expected to have risen 7 percent.
Inflation will increase expectations the Reserve Bank of
India will raise interest rates for a third time in four months
at its policy review next week, despite the slowest economic
growth in a decade.
Although rate hikes are unpopular with businesses and
investors, Chidambaram said: "It is common knowledge that the
government of the day will pay a price for high inflation,
especially if inflation persists over a long period of time."
Speaking an event organised by the Finance Ministry, he
called monetary policy a "blunt instrument".
"The answer to inflation, therefore, especially inflation in
food articles, is to increase supplies and to radically
transform the manner in which commodities and food articles are
stored, transported, distributed and sold in the various
markets, especially urban markets."
Chidambaram has repeatedly vowed to honour budget deficit
limits, but investors worry that the polls will prompt spending
on the lines of the $20 billion plan to provide cheap grain to
the poor earlier this year.
The government headed by Prime Minister Manmohan Singh has
been widely criticised for policy drift and for allowing
corruption to spin out of control. Congress lost four key state
elections, according to results on Sunday.
Inflation has been another thorn, leaving the RBI with a
tricky balance between fighting high prices or boosting growth.
So far it has tried to squeeze inflation, raising interest
rates by a quarter percentage point in September and again in
October. Its next policy meeting is on Dec. 18.
"Our effort is firmly on controlling inflation," central
bank governor Raghuram Rajan said at the same conclave.
"We can spend a long time debating the source of inflation.
But, ultimately, inflation comes from demand exceeding supply
and can be contained only by bringing both in balance."
Although India's current account deficit has narrowed,
easing some pressure on the currency and economy, the RBI
governor acknowledged in a separate speech in the afternoon that
it was too early to be confident.
"The prospects of growth are a little better. I would say
growth is stabilising. It is still too early to say we are in
the midst of a strong recovery," Rajan said in a speech at an
industry function in the eastern city of Kolkata.
Data on Wednesday showed the trade deficit
narrowed in November as gold and silver imports slumped 80.5
percent, but the pace of exports of goods slowed from October.
Rajan said no single data point would drive the next
monetary policy decision.
"Today the Indian situation is unique. In all developed and
developing countries, nobody has as high an inflation rate as
India has despite the fact that we have slowed down so acutely,"
said Rupa Rege Nitsure, chief economist at Bank of Baroda in
"It's a politically sensitive issue and the government is in
the election frame of mind," she added.
The government also faces the challenge of delivering on its
promise to keep the fiscal gap to 4.8 percent of gross domestic
product. The deficit has reached 84 percent of the fiscal year
target in the first seven months.
On Wednesday, Chidambaram sought parliament's approval for
an extra 131.2 billion rupees ($2.14 billion) to cover costs
such as higher fertiliser and fuel subsidies, saying this
spending would not have a "significant" impact on the deficit.
"There can be no compromise, and I speak for the government
when I say there will be no compromise, on the decision to walk
on the path of fiscal prudence and contain the fiscal deficit,
step by step, year by year, until we reach the goal of 3 percent
of GDP in 2016-17," Chidambaram said.
(Additional reporting by Rajesh Kumar Singh in NEW DELHI, Sujoy
Dhar in KOLKATA, and Subhadip Sircar and Neha Dasgupta in
Mumbai; Writing by Rafael Nam; Editing by Kim Coghill/Ruth