The spectre of rising inflation has now engulfed many economies in the world ranging from the US and the UK to China, West Asia, and India. The symptoms were in the making for some years.
The Iraq war marked the onset of high and higher oil prices. There was a steady rise in the prices of most commodities in the global markets including metals and food in the last three years for various reasons including substantially increased consumption in new markets such as China, Russia, India and West Asia.
However, till recently, most economies were able to manage such price escalations through classic macro-economic management tools. Something has changed in the last 12 months, which has rendered frantic interventions from most of the governments and governors of central banks across the globe ineffective.
The last straw has been the onset of a near certain recession in the US and the precipitous decline of the US dollar, which has put even more pressure on the other economies of the world -- both developed as well as developing.
Not surprisingly, growing inflation has now become the single most important issue in India too. In the backdrop of the general election year, this issue is probably going to be the most important one for the United Progressive Alliance and its many adversaries.
Unfortunately for the UPA, the roots of the current inflationary spiral lie outside India and hence it would be a Herculean task for it to do anything rational that can curb the inflationary pressures in the near term. Imports are certainly not an option since the prevailing global commodities prices are already sky-high and hence even zero import duties will have little impact on prices of food in particular.
Subsidies may work but with the inherent weaknesses in the public distribution system, it is likely that the benefit of any such subsidies will be cornered by unscrupulous elements, leaving the lowest and middle income strata exposed to the searing heat of rising prices.
The initial data on inflation indicate a much higher rise in prices of food items, and that too more in urban India with the largest cities, including Delhi and Mumbai bearing the maximum brunt. This will certainly have a major ripple effect on many industrial and service sectors in India.
In 2008, spending on food and grocery accounts for almost 42 per cent for all Indians and over 47 per cent for Indians in the lower income strata. A 10 per cent increase in prices of food and grocery reduces the available discretionary incomes by almost 5 per cent for most other than the rich and