Food prices have been rising steadily from the beginning of this year. That was even before the onset of a failed monsoon, the consequence of which will emerge in due course. It is more than conceivable that food inflation will not end even when this year’s harvests come in. Actually, what we have been observing is not just rising food prices but that food-price inflation itself is rising, or, food prices are rising at an increasing rate. This introduces an altogether different level of concern. Ministry of Statistics and Programme Implementation (MOSPI) data shows that the year-on-year food inflation of 2.1% for the month of January more than doubled to 7.7% by September.The figure for October is yet to come in. It is striking that food inflation has risen in every month since January, an outcome that seems to have gone unnoticed during the hullabaloo over the latest quarter’s Gross Development Product (GDP) growth rate, which to the government’s delight had turned out to be higher than predicted. That a single quarter’s growth rate should get so much attention when it is not even a direct estimate but based on the growth of some input indicators itself suggests that the public discourse on the economy just ricochets from one data point to another without an awareness of what really matters.Lack of strong defences against food inflationThe accelerating food inflation that we are observing, matters for living standards, as the share of food in consumer expenditure is very high in India unlike in the developed economies. At close to 45% it dwarfs the figure of 21% for China, not to mention the US, where this share is only 7%. With food so large an item in household budgets, one would expect that economic policy in India would have strong defences against food inflation. Sadly, it does not.What does it mean to say that the desired defences are absent? It means that we have few instruments in our economic policy that can effectively control food prices, even if appearances are to the contrary, as I explain. Officially, inflation is supposed to be controlled by monetary policy. To affirm the seriousness with which inflation control is viewed by it, in 2016, the Modi government, by a parliamentary amendment to the RBI Act 1933, re-designated inflation control as the principal objective of monetary policy in India.The means of inflation control was to be ‘inflation targeting’, implying that it would be controlled directly, instead of indirectly via control of the money supply. The instrument was to be the ‘repo rate’, the rate of interest at which the Reserve Bank of India (RBI) lends to commercial banks. The claim was that through increases in the repo rate, the RBI would both contract demand and lower expectation of inflation whenever inflation rises above the tolerable level. In this scheme, the contraction in output that is expected to accompany a rate-hike is not viewed as a welfare loss, for inflation is treated as a symptom of output being above its ‘natural’ level.Now, the natural level of output is a nebulous concept even apart from being unobservable, and there is no consensus among economists on how it is to be measured. This has not stood in the way of its being enshrined in the western economics cannon as the proper approach to inflation control. It’s attractiveness to its votaries flows from the claim that the natural level of output is the level that would have prevailed had the market been left free from any government intervention.According to this view, inflation increases when actual output is led to exceed its natural level because banks set the rate of interest below the natural rate of interest, itself unobservable and therefore impossible to measure directly, if at all. How a theory based on unobservable variables attained the status of “truth” invites the Foucaultian insight that “knowledge is power”. That this reasoning is relevant to inflation targeting becoming the officially accepted definition of monetary policy in the Indian case at least I make clear at the end of this article.Why inflation targeting does not workWhen India shifted to inflation targeting in 2016 it was described as a move to a “modern monetary policy framework”. However, it would be agreed upon that in matters economic the proof of the pudding is in the eating. Why does the price of food continue to rise if India has a world-class inflation control strategy? The answer is simple. M. Parameswaran and I have for some years now been investigating inflation in India. I would like to flag three of our findings based on statistical methods, which are available in the public domain. First, inflation is driven by the relative price of food and not the output gap, i.e., the extent to which output exceeds its natural level. Secondly, neither expectations nor the RBI’s repo rate are seen to matter to the dynamics of inflation. These are crucial findings in that they cut at the root of the claim that inflation targeting will work in India.Also Read: Inflation Squeezes Multiple Sectors: Sweet Prices Rise in Festive Season, FMCG Hit Too, Rural Wage Growth Slows DownThe reason why inflation targeting does not work in India is apparent from the above findings. Inflation in India is driven by the price of food, and inflation targeting has no means of controlling this price. It’s understanding of inflation is based on firms setting prices based on their expectation of inflation, which in turn drives inflation. This may approximate price formation in industrial-goods markets, if at all, but it is a poor model of how agricultural markets, of which the market for food is one, actually work. Here, the very large number of sellers leaves them without the power to affect the market price. Price movements in such markets are driven by the supply-demand balance.The demand for food is believed to be steady and, therefore, price increases occurring in the short run are seen as mostly due to lower supply. In the long-run, when supply and demand are expected to grow, there would be inflation if the growth of supply does not match the growth of demand. The truth is that ‘inflation targeting’ which defines the RBI’s policy on inflation is based on a model that is not fitted to even address, leave alone restrain, food price inflation. We can see this in the surging food inflation for the past nine months.Food inflation cannot be controlled through monetary policyA rationale provided for not paying particular atttention to agricultural prices in the model underlying inflation targeting is that agricultural output fluctuations are random, and, therefore, cancel out over time. If this were true, food prices should not rise continuously, and for all good purposes may be ignored by the central bank. This however is not the case in India. In the more than two decades since 2003 it has risen by a staggering 58%. Food inflation cannot be controlled through monetary policy. It would need interventions at the level of production that raise productivity, enabling farmers to supply more at steady prices. These interventions needed range from assuring steady water supply and electricity to timely availability of fertiliser. State governments would be central to any such initiative.How is it that we find ourselves in a situation that economic policy in India has few if any defences against food inflation? It stems from the wholesale borrowing of western economic models even when their relevance to the Indian economy is moot, as we see with ‘inflation targeting’. The economic reforms 1991, heavily based on the ideal economic architecture for developing countries such as India propagated by the Washington-based financial institutions were the turning point.Economic policy in India lost its moorings when its ruling elites, and the economists who advise them, became transfixed by the goal of replicating the economic architecture of the west here, no matter that it may be irrelevant. Contrast this with the clear-sightedness of India’s policy makers in the fifties, epitomised by Nehru’s statement that India will not follow the economic policies of either the US or the USSR, as “our problems are our own”.This independence of thought was visible in the RBI itself. Till about the 1980s it seems to have maintained an autonomy vis-à-vis economic ideas emanating from the west, at least displaying the awareness that food-price inflation needs to be addressed separately. In the eighties its inflation-control policies began to resemble monetarism, with its focus on the money supply. Monetarism had been popularised by the economist Milton Friedman who was driven by the singular objective of discrediting government intervention in the economy. He had a brief moment in the sun when his policies were adopted by Margaret Thatcher in the UK and western central banks, but the latter soon moved away from monetarism, notably the Bundesbank.A ‘nationalist’ govt following examples of western central banksFor the RBI, a brief respite from the stranglehold of a discredited strategy came in the 1990s when it shifted to a “multiple-indicators approach”, which, as the name suggests, focused on a much wider set of variables than the money supply. Interestingly, even this shift in focus did not extend to unemployment nor did it show an ability to tackle food inflation but at least the RBI was charting its own course rather than hitching its flag to some idea emanating from outside India. Then a reversal took place, and in 2016 India’s central bank made the move to inflation targeting, the practice followed by western central banks.It is interesting that this embrace occurred at a time when India had an avowedly nationalist government. Be that as it may, it has meant that India has no defences against food inflation left, as seen in its thrusting presence in recent months.Pulapre Balakrishnan is the author of ‘India’s Economy from Nehru to Modi: A Brief History’, Ranikhet: Permanent Black.