Data cafe: A tale of two inflations

Updated: March 25, 2016 2:01:34 AM

Why rural consumer price growth is higher than urban inflation?

The Reserve Bank of India (RBI) and the government have been quite content with their performance, at least on the inflation front. Both have not only been successful in finalising a new monetary policy framework last year, but have also been able to keep inflation well within the 6% target set by RBI for January 2016.

While the February inflation numbers released a fortnight ago show a further decline in the CPI rate to 5.18%, a closer analysis highlights that underneath the declining inflation is a growing rural-urban divide, with rural price growth 1.7% higher than urban.

Much of this gap—which has been over 1% for the past 10 months—can be explained by market inefficiencies and structural bottlenecks in transmission of prices to rural areas. While urban consumers were able to enjoy the benefits of tumble in global commodity prices, their rural counterparts’ over-reliance on non-oil substitutes has led to higher inflation.

An HSBC report released in October further highlights that limited access to cheaper imports of foods and commodities, along with a steep decline in potential growth, is likely driving excess core inflation in rural areas. This is not the only problem. An analysis of state-wise inflation data by Crisil chief economist DK Joshi shows that higher-income states such as Haryana, Kerala, Uttarakhand, Maharashtra and Gujarat have lower retail inflation than the low-income states of Bihar, Jharkhand, Odisha and Chhattisgarh.

An attempt by the government to increase rural incomes, as envisaged in the Budget, may further exacerbate the problem as incomes go up without the government addressing any structural bottlenecks. Empirical data suggests that MGNREGA has had less impact than MSP increases on inflation, but a paper by V Dhanya in RBI on Implications of MGNREGS on Labour Market, Wages and Consumption Expenditure in Kerala points that removal of inefficiencies in MGNREGA can increase rural incomes, thereby directly increasing food consumption in rural areas, which will automatically feed into inflation pressures in the economy.

Although India may sail comfortably through this year as normal monsoon is expected to increase productivity and bring down food prices in rural areas. But if the government is serious about countering inflation, it needs to remove structural bottlenecks like improving road infrastructure and markets mechanism in rural areas. India has always seen pro-poor and pro-market reforms as substitutes, but they are rather complimentary; it is only a pro-market stance that can help the poor in countering market inefficiencies.

Written By: Ishaan Gera

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