Are we marching towards Hyperinflation?

Indian Commerce Department announced food price index jumped to 14.4% in the December 18, 2010 week. This is accelerated from 12.13% from previous week. During the week of Dec 18, Onion is up over 40%, Vegetables up 29%, Fruits 21%, egg, meat and fish up by 20%. The concern is whether food-driven inflation will spread to wider pickup in inflation. I would say not yet, but there is greater risk now. Inflation can get into vicious cycle.
The developed economies are growing in anemic phase. The Asian economies, particularly China and India are growing rapidly. When there is a rapid growth (with imbalance between developed and developing nations) there will be more money supply resulting in inflation. We were seeing that in real estate before the Lehman brother crash. In Asia, real estate is recovered and it is closer to pre-crash level. Now we are seeing food inflation. Food inflation is politically very sensitive and could bring down Governments. Couple of weeks back, China took actions to curb its food inflation as well.
The political leadership is trying to attribute this to excessive rain this year. India banned the export of Onions and started importing from Pakistan. The million dollar question is whether it is seasonal. I strongly doubt it. There is fundamental shift in the economy for last two decades. We were moving away from Agricultural based economy into Industrial based one. The agricultural lands are being converted into housing plots and industrial areas. Many lakes (particularly around Chennai) are now industrial complexes. In nut shell, the cultivable land is shrinking. The cost of labor (due to industrialization) is rising. The agriculture is not profitable and people are moving away from that profession. On the demand side, our population is growing and per capita income is increasing. This drives the demand. This imbalance needs to correct. The outcome will be increase in productivity (produce more quantity with less resources) or reduced demand or combination of both. There is no significant focus on productivity. People are scared about genetically modified produce as well. The Government is trying to control the price by increasing supply through import. The current need is "Government should come up with long term plan such as Green Revolution and it must be multi faceted approach"
In case,  the inflation spreads to other core components. We should watch for this.

• Indian currency will depreciate. Will increase the cost of import.
• People will invest more on hard assets such as Gold, Real estate, etc.
• Interest rates will go up, reducing money supply. This could push economy into recession.
• Bond prices will fall pushing interest rate up
• Could significantly decrease the purchasing power.

I have great respect for Dr. Manmohan Singh as an economist. I am confident he will take necessary measure to curb inflation without sacrificing the growth. Failure to do so now will lead to greater inflation risk. That could potentially bring down the Government.