The vote is over, and the nuclear hungama is thankfully on the backburner for a while. The UPA has won. And the election season is in. India’s political economy in the next few months is going to be about emerging political coalitions. And the forthcoming elections are going to be about India’s inflationary crisis. Whether we blame international pressures, or high growth, or government mishandling, the fact of the matter is that there is a crisis on the price front. To make matters worse, poor rains in western India have raised the price of onions to Rs 880 per hundred kilograms from about Rs 430 on June 30 in major mandis.

Not only are rising prices going to have economic and social effects, there will certainly be serious political ramifications. Inflationary conditions will probably persist and may even get worse. While many believe such conditions are primarily due to rising energy costs, the data in India suggest that food and commodities are also a major determinant.

In other words, despite the fact that the government has not passed on a large part of the fuel price increases to the consumer, prices have been rising rapidly.  Eventually, oil price costs will certainly be passed on to the Indian citizen, one way or another. The government may do so directly, through prices at the pump, or indirectly through greater losses in the public sector backed by some accounting jugglery like oil sector bonds. It might seem to some that the latter implies that government is “absorbing” the price rise. Not so: it is not in the government’s DNA to absorb anything; all that it can do is control the manner in which such shocks are directed into the national economy.

... contd.