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Why is inflation higher in rural India than in urban?

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Why is inflation higher in rural India than in urban?

Retail inflation in rural regions stood at 7.15% in August, higher than urban inflation of 6.72%.

ByMimansa Verma

Retail inflation for August in India rose to 7%, remaining above its central bank’s tolerance band (2%-6%) for the eighth straight month. What stands out even in this is the consistently higher rate for rural areas than urban ones.

In India’s hinterlands, retail inflation stood at 7.15% in August, while in urban areas it was 6.72%, data released on Sept. 12 show. And that difference has remained almost all through the past eight months.

Interestingly, higher rural inflation was the norm (pdf) in the country till around 2018. Around that time, India began witnessing increased investments, fuelling urban demand. This continued till around 2020 when rural and urban inflation figures began to converge again.

The reasons for higher rural inflation in India

Consumer price index (CPI)-based inflation measures the movement in prices of food and beverage, clothing and footwear, housing, fuel and light, pan, tobacco and toxicants, and miscellaneous. These commodities have different weightage in the rural and urban inflation baskets.

The food and beverage category includes cereals, meat and fish, eggs, milk products, fruits, vegetables, and spices, among others.

The primary reason rural retail inflation is higher is the larger share of food and beverage components in the rural CPI basket.

In rural CPI, it accounts for 54.18%, but only 36.29% for urban inflation. The assumption is that rural Indians spend a higher portion of their income on food items.

While food inflation in August was not too different in rural and urban India, the gap was around 100 bps in March when crude oil prices spiralled after the Ukraine war broke out.

Rural inflation affects the most number of Indians
It must be noted that nearly 65% of the 1.4 billion-odd Indians live in rural India, which also accounts for up to 30% of the country’s GDP.

The Covid pandemic of 2020 saw millions of Indians, primarily migrants, losing jobs in cities and moving back to their villages. It is this segment that could be worst off with high food inflation.

Besides, uneven rainfall has affected sowing activities, too, causing an even more increase in rural joblessness, according to Mahesh Vyas, head of the Centre for Monitoring Indian Economy.

“…higher cereals inflation in rural areas compared to urban areas since June 2021 is having an adverse impact on rural demand at a time when nominal rural wage growth is lower than rural inflation,” Sunil Kumar Sinha, principal economist of India Ratings and Research, told The Indian Express newspaper.

Inflation remains a concern
In around a month, the RBI will have to explain to the government this breach in its inflation band. What’s worse is that there is little sign of relief.

“CPI inflation will be facing a complex maze of upside and downside risks in the second half of FY23,” QuantEco Research said on Monday (Sept. 12).

While easing crude oil prices will help, the rupee’s weakness, along with pent-up demand for services like hospitality and tourism, may worsen things.

Export regulation on food grains like rice and pulses could only moderately help ease domestic supply. Price pressures would, therefore, persist, according to economists.

Nomura economists expect India’s retail inflation to remain above 6% through February 2023, with September’s reading seen at around 7%-7.5%.

 

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