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Higher Inflation in Rural India

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April 18, 2022

What is the issue?

The retail inflation rate surged to 6.95% while the rural inflation surged to 7.66% this March.

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

Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.

  • Urban inflation has usually tended to be higher than rural inflation by an average of about 0.8 percentage points through 2021 except August and May 2021.
  • The rural inflation surpassed the urban inflation by 0.2 percentage points in January 2022 and reached 6.38% in February even as urban inflation declined to 5.75%.
  • In March 2022, the gap between the two has surpassed 1.5% with urban inflation at 6.12% and rural inflation hitting 7.66%.

inflation

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

  • Food inflation- Food has a higher weight in the Consumer Price Index (CPI) and food inflation was the key driver for the headline inflation rate jump in March.
  • The food inflation in rural India reached 8.04% whereas food inflation in urban India was a full percentage point lower.
  • The vegetable price trends have been most worrisome that reached 10.6% in March 2022.
  • Fuel inflation- The inflation in fuel and light and clothing, were the key factors driving up rural prices.
  • The fuel prices are higher in rural areas due to connectivity issues and prices of traditional fuel like firewood have also risen simultaneously.
  • Education- A persistently higher inflation in education costs of about 1 to 1.5 percentage points was witnessed.
  • Labour shift- This trend could also be explained by the shift of labour between urban and rural areas in the last two years, which has also injected volatility into demand dynamics.
  • Others- The inflation rates for items such as oils and fats, clothing, footwear, fuel and light and personal care were higher than the urban counterparts.

CPI

Which sections are affected the most?

  • Sections affected- While high inflation affects the poor the most in general, the fact that price rise in food is driving the current surge.
  • Also, the food inflation is expected to rise along with both fuel and core inflation (excluding food and energy prices).
  • The bottom 20% of the population in urban as well as rural India is facing the worst effects.
  • The rural bottom 20% faced the highest inflation at 7.7% in March, while the upper 20% of the income segment in the rural experienced 7.6% inflation.
  • Reasons- While food price risks have risen due to the Russia-Ukraine conflict, higher prices for farm sector inputs could further drive the food inflation.
  • Future prospects- The cost of production is likely to increase by around 8-10% and the MSP should at least be higher by around 12%-15%.
  • With a normal monsoon anticipated this year, this would determine whether rural consumer demand will rebound or remain constricted in upcoming months.

 

References

  1. https://www.thehindu.com/business/Economy/explained-whats-fuelling-higher-inflation-in-rural-india/article65326392.ece?homepage=true
  2. https://www.investopedia.com/terms/i/inflation.asp

 

 

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