Explained | What is driving higher inflation in rural India?


Why are food, clothing and fuel prices higher in the hinterland? Will a good monsoon help ease the crisis?

Why are food, clothing and fuel prices higher in the hinterland? Will a good monsoon help ease the crisis?

The story so far: Retail inflation rose to 6.95% this March – the highest level in almost a year and a half, capping six straight months of rising prices for consumers. With incremental increases in fuel prices only starting in the second half of March, the full impact of higher global oil prices being passed through to consumers will not be reflected until April. Economists expect inflation to surpass 7% and hover around that level through September. However, in large parts of the country, the experienced price increase has already exceeded 7.5% and even 8%. Official data put rural inflation at 7.66% in March, with several states reporting even higher inflation including West Bengal (8.85%), Uttar Pradesh and Assam (8.19%) and Madhya Pradesh (7.89%). ).

How have urban and rural inflation trends differed over the past year?

Urban inflation has typically been an average of about 0.8 percentage point higher than rural inflation for most of 2021 – the only exceptions being August when both were 5.3% and May when rural Inflation was 6.6% and urban inflation was 5.9%. In December 2021, urban inflation was 5.9%, while rural inflation was 5.4%. In contrast, March 2022 was the third consecutive month that the pace of inland price increases outpaced urban India, and the gap has widened rapidly. From a marginal 0.2 percentage point higher inflation than urban India in January, rural inflation hit a nine-month high of 6.38% in February, although urban inflation eased to 5.75%. In March, the gap between the two has exceeded 1.5%, with urban inflation at 6.12% and rural areas at 7.66%.

What are the main drivers of higher inflation in the hinterland?

While food inflation was the main driver behind the rise in headline inflation in March, with the headline consumer price index for food rising to 7.68% from 5.85% in February, the increase was far more pronounced in rural India, where food inflation hit 8.04% . Urban food inflation in India was a full percentage point lower. Madan Sabnavis, chief economist at the Bank of Baroda, estimated that higher inflation in food, which carries a higher weight in the consumer price index, along with inflation in fuel, lights and clothing, were the key factors pushing up rural prices. Consider the rates of inflation for some items that rural consumers face compared to their urban counterparts – oils and fats (20.75% vs. 15.15%), clothing (9.9% vs. 7.74%), shoes (12.2% vs. 9.9%), fuel and light (8.3% vs. 6.3%), personal care and effects (9.3% vs. 7.7%) and last but not least, persistently higher inflation the cost of education by about 1 to 1.5 percentage points.

“Backlog demand appears to be higher in rural India, so apparel sees higher inflation when demand picks up. In addition, fuel prices are higher in rural areas due to connectivity issues, while at the same time the prices of traditional fuels such as firewood have increased,” explained Mr. Sabnavis.

ICRA chief economist Aditi Nayar said part of this trend could also be explained by the shift in labor force between urban and rural areas over the past two years, which has also led to volatility in demand dynamics.

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Interestingly, while vegetable prices fell in urban areas between February and March 2022, they rose sharply month-on-month in rural India, although the inflation rate for vegetables in absolute terms remained lower than in urban areas at 10.57% 13.37% inflation was recorded,” she added. Indeed, vegetable price trends have been extremely intriguing – rural inflation was 1.4% in January, 3.7% in February and a whopping 10.6% in March.

Which areas are most affected and what’s next?

While high inflation generally hits the poor hardest, the fact that rising prices for food, the largest component of their consumption basket, is driving the current surge is particularly stressful, noted Crisil chief economist Dharmakriti Joshi.

Using data from official surveys, Mr. Joshi’s team has estimated that the bottom 20% of the population in urban and rural India are worst affected. The bottom 20% in the countryside experienced the highest inflation in March at 7.7%, while the top 20% of the hinterland income segment experienced inflation of 7.6%.

“As upward pressure mounts, inflation is broadly supported. Last year, low food inflation contained the headline count, while fuel and core inflation (excluding food and energy prices) rose. Now food inflation is expected to rise along with fuel and core inflation,” he said.

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While food price risks have increased due to the Russia-Ukraine conflict, higher farm input prices could further fuel food inflation, Soumyakanti Ghosh, chief economic adviser to the SBI Group, said in a report Wednesday. “Production costs are likely to increase by about 8-10%… the minimum support price should be at least about 12-15% higher,” he pointed out. With a normal monsoon expected this year, the inflation curve over the coming months would determine whether rural consumer demand recovers or focuses on essential goods and services.

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