Economics - gulf between theory and practice

Great Depression 2.0? Yes or no, but the inflation is well and truly set in India, if not the rest of the world. There are some reasons offered for inflation in India, for instance, Pulses, fruits and milk push food inflation to 16.74 p.c. I think the total issue is being viewed upside down. It is the government imposed taxes and prices (petrol/diesel for instance) which is leading to the escalation of prices of pulses, fruits and milk.

I seem to be of the view that government is the necessary evil in this case. There has to be a central government to promote 'equal opportunities' in everything for everybody. On the other hand, the government has to be even more federal. VAT in India was imposed because most shops and vendors evaded sales tax by showing lesser sales. Sales tax directly gave state governments easier and better access to financial resources. With VAT coming in, central Govt was supposed to 'compensate' state governments. In theory, VAT is good for having a better control of taxes in 'structured' markets, but in practice India thrives ONLY in 'informal markets' and not really by a well-oiled regulatory mechanism. To quote from the article on experience of VAT in India,

on one hand economic reforms have led to decentralization of expenditure responsibilities, which in turn demands more decentralization of revenue raising power if fiscal accountability is to be maintained. On the other hand, implementing VAT (to make India a single integrated market) would lead to revenue losses for the States and reduce their autonomy indicating greater centralization.

The only way vendors could lower the sale prices of items was to evade taxes. With tax evasion (NOT avoidance) no longer in the picture, because of VAT, the only way consumer can hope of lower prices is to expect 'shop keepers and vendors' to be socialistic. Well, business is all about making money and who will speak socialism, forget communism, in a capitalist scenario? Who is going to say that gain of Rs.5/- is enough than to make a kill with a profit of Rs.50/-?

Krugman, Stiglitz and co are talking of deflation and other threats which is making this 'recession' messier. I find it funny that they are still calling it a 'recession'. Europe is apparently becoming messier because of Euro and austerity measures. US is already messy with seat belt tightening not working out as it was expected to. In India, no one knows how this is going to peter out, rather how and when this is going to explode.