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Business News/ Market / Stock-market-news/  If rural demand is low, why is rural inflation high?
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If rural demand is low, why is rural inflation high?

Basic economic law would suggest that lower demand will drive down prices of goods and services, but the opposite has been happening in the country's rural markets

While overall retail inflation has been under RBI’s comfort level till two months ago when it started to pick up, rural inflation has been constantly running above RBI’s target. Photo: APPremium
While overall retail inflation has been under RBI’s comfort level till two months ago when it started to pick up, rural inflation has been constantly running above RBI’s target. Photo: AP

New Delhi: The perception that everything is cheaper in rural India compared with cities will be seriously challenged if you closely look at retail inflation figures released by the statistics department every month.

The Central Statistics Office releases monthly retail inflation data based on consumer price index for both rural and urban India. Inflation in rural India has accelerated faster than urban India every month since January 2015.

This comes at a time when many parts of India is facing a drought-like situation for the second consecutive year, affecting about 330 million people.

The distress in rural areas, which accounts for 54% of the nation’s total demand, has crimped sales of consumer goods makers.

Basic economic law would suggest that lower demand will drive down prices of goods and services, but the opposite has been happening in the country’s rural markets.

And surprisingly, it is not limited to any one category of consumer products. Except for “paan, tobacco and intoxicants", all other categories such as food and beverages, clothing and footwear, fuel and light and basic services such as health, education, transport and communication, prices are rising faster in rural India than in urban India.

The gap between urban inflation and rural inflation is the widest in clothing, footwear and fuel and light categories. For example, in May, while inflation for the clothing and footwear category was 3.78% for urban India, it was 6.31% for rural India. Similarly, for the fuel and light category, inflation was 0.09% and 4.51% for urban and rural India, respectively.

Economists Pranjul Bhandari and Prithviraj Srinivas at HSBC, in a research note titled ‘India’s inflation divide’ released in October last year, said though the dramatic fall of oil has pulled down both “fuel" and “transportation" prices, the pass-through has been lower for rural India. “Data suggests that rural India’s fuel mix is more geared towards domestically produced firewood, chips and biogas inputs, which are not a part of the global deflation cycle. On the other hand, fuel products more widely used in urban India, i.e. LPG and diesel, have benefitted from lower global prices," they added.

However, what must be hurting the most is the high food and beverages inflation in rural India which is consumed more in rural areas than in cities. In May, prices of such products rose 6.74% in urban India and 7.48% in rural India.

Bhandari and Srinivas said structural bottlenecks, sparse transport networks and insufficient distribution channels are not letting rural Indians benefit fully from global deceleration in inflation rate. “In case of food, benefits of cheaper imports are not reaching rural areas as efficiently," they added.

The two HSBC economists also raised a pertinent question. “Can the RBI (Reserve Bank of India) sustainably achieve its 4% inflation target of early 2018 with a rural sector so close to heating up?"

While overall retail inflation has been under RBI’s comfort level till two months ago when it started to pick up, rural inflation has been constantly running above RBI’s target. For example, though RBI met its January 2016 retail inflation target of 6% helped by lower urban inflation at 4.81%, rural inflation was running at 6.48%. This peculiarity in India’s retail inflation seems to have missed RBI’s policy radar so far.

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Published: 15 Jun 2016, 01:03 PM IST
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