Finance Minister P. Chidambaram has earmarked Rs 10,000 crore as incremental cost to implement the Food Security Bill, which he described as a promise of the UPA government.
A centrepiece of the ruling government's campaign in 2009, the Bill was cleared last month by a parliamentary committee.
The Bill says 75 per cent of the rural population and 50 per cent of the poor in urban India - about 800 million people - will be entitled to five kilos of subsidised grain per month. Rice will be made available at Rs. 3 a kilo; wheat will cost Rs. 2 a kilo and cereal will be sold for Rs. 1 per kilo.
RBI officials are worried that maintaining populist spending on subsidies for food, fuel, fertiliser and cooking gas will push up prices, according to a Reuters report. While this spending, fuels consumer demand, especially for food, it is also a key driver of inflation in India.
"If spending on social schemes comes at the expense of capital expenditure, it will be bad," an official with direct knowledge of policymaking told Reuters. "Inflation will go up, and there will be food inflation from the demand side."
For this year, the government expects to spend about Rs 1,30,000 crore on food subsidies.
The government would like to be able to seek re-election in 2014 by highlighting that it has delivered on a major promise made by Congress president Sonia Gandhi and other leaders of her party during their campaign in the last general election.
The scheme will be linked to the Aadhar scheme which provides every citizen with a unique identification number that's linked to a database that includes the biometrics of all card-holders.
In earlier versions, the Food Security Bill assigned subsidised grains on the basis of "priority" and "general" groups, which were demarcated on the basis of poverty levels.
(With inputs from Agencies)