If anything, Indians are as price sensitive as people in any democratic country around the world. So it should come as no surprise that the issue of inflation has acquired political overtones. These days every election is being fought on the issue of price rise. In the most recent elections held in Karnataka the ruling regime lost the election because a vast majority of the electorate blamed them for rising prices of essential commodities. The government in New Delhi is blaming the price rise on international factors. But that is not completely true. Fiscal mismanagement by the ruling elite might have as important role to play.

A quote from Milton Friedman accurately sums up what is happening in India and in the rest of the world: “Inflation is the one form of taxation that can be imposed without legislation.” Every time inflation notches up by a percent, it is like the government pinching few rupees out of your pocket, without you even realizing the damage before it is too late. The rate of interest offered by most banks in India is unable to keep up with inflation, so instead of getting positive returns, your deposit ends up losing money. The price of milk has risen by almost 10% in the last two months, the price of grains has risen by 15%, and cooking oil by 12%. The rise of poultry and meat products are much higher.

The truth is that the price rise is much higher than the ballpark figure of 11% that the government statistics suggest. In India we are still using the obsolete method of computing inflation, called the Wholesale Price Index (WPI), which was devised by the British government way back in the year 1902. But since 1970 most developed countries around the world have switched to the Consumer Price Index (CPI), which is more efficient in portraying the facts about the economy. The main problem with WPI is that it uses average price of goods traded at wholesale level to compute inflation, so it cannot be a barometer for the increased price that consumers buying at retail level have to pay.

It is high time that India discarded the WPI and started using the CPI. The WPI system is also plagued by the fact that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. The last time when the WPI series of commodities was constituted was way back in 1993. Since then the list has not been reconstituted even though there has been a massive change in consumption patterns around the country. Another problem with the WPI is that it does not feature the services sector. The price your barber charges to give you a haircut may have doubled, but that will never reflect in the official inflation figure.

The best way to curb inflation is by cutting down unnecessary government spending. But that is easier said than done. The mandarins in the corridor of power don’t prefer to hear about a smaller and more efficient government. They would rather try to bring down the inflation by curbing growth. That is what is happening in India today. Interests rates are at an all time high, and as a result of which growth is slowing down. Over a period of time slower growth will lead to lowering of demand and that in turn will lead to lower prices. But rising interest rates means that people who have purchased flats or vehicles on loan have to pay much larger installments every month.

Another atrocious way by which inflation is dealt with in socialist India is by resorting to unnecessary government interference in commodity markets. A few commodities that cause inflation are identified, and the government swings into action: banning exports, giving out import licenses, banning futures trading, sending the police to unearth so-called instances of hoarding, etc. This process is extremely discretionary and it often leads to corruption. It is also bad for India’s farmers. The export of wheat was banned and its price fell. But why should wheat farmers pay for a macroeconomic problem of inflation?

In an interview telecast on CNBC Finance Minister P. Chidambaram expressed concern at the relentless rise of crude oil, commodity and food prices, and he put partial blame for the rising food prices on what he termed as the foolish diversion of food to fuel by certain nations. Though he did not specifically name a country, his target was clearly the USA, where food crops like corn are being used in massive quantities for creating ethanol. It is typical for an Indian politician to blame other countries for their own woes. Why doesn’t the finance minister care to explain the reason why we are forced to import food from the outside when majority of our population is engaged in farming?

The fact remains that despite being one of the world’s fastest growing economies, India is also the home to millions of poor who are forced to live in slums such as Dharavi. To such people who are already leading a hand to mouth existence even a small fluctuation in price of food items can lead to terrible hardships. In order to remedy the situation for the lower class, the government needs to do much more than just give fancy speeches. Inflation in India is a basically a supply side problem. The supply of essential commodities has to be increased in order to curb prices. That takes us on the issue of agricultural reform, which is such a hot potato that no political party in India is ready to tackle it.

This is the time for bold initiatives not just from the Indian government, but also from every other government around the world. It is also a fact that the biggest risk for rising inflation lies in emerging economies like India, China, South Africa, Brazil, Russia, and not in the developed world. As food is a big part in household spending for people living in emerging economies, these countries are more prone to a surge in inflation, and the social and political consequences are also likely to be far more severe.