BackHow rural and urban inflation compare in India
Since 2012, year-on-year rural inflation has been on an average about 60 basis points higher than year-on-year urban inflation
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For the most part of the last five years, consumer price inflation in rural areas has outpaced consumer price inflation in urban areas, as figures 1 and 2 show.
Rural inflation was lower than urban inflation only for a brief period in mid-2013, and for two months at the end of 2014 (a drought year), as figure 2 shows.
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Moreover, since 2012, from which time separate indices for rural and urban areas have been available, the year-on-year rural inflation has been, on an average, about 60 basis points higher than year-on-year urban inflation. One basis point is one-hundredth of a percentage point.
This difference in rural and urban inflation could occur for two reasons: first, the basket of goods on which inflation is calculated in rural areas might be different from the corresponding urban basket. (We had covered the difference in these two baskets in an earlier piece.The other possibility is that prices of the same commodities have changed at different rates in rural and urban areas.
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Digging deeper into the data, we can compare urban and rural inflation at the commodity/commodity-group level. As we can see from figure 3 (where we look at prices “one-level deep"), there is indeed a difference in rural and urban inflation at the commodity group level.
Food and beverage prices in rural and urban areas track each other closely, while “pan, tobacco and intoxicants" actually seem more expensive in urban areas. Interestingly, inflation in clothing and footwear has dropped rapidly over the years in both rural and urban areas, with the drop in urban areas being much steeper. Before we jump to conclusions, however, it is pertinent to note that e-commerce accounts for less than 1% of all retail trade in India (though the share might be higher for clothing and footwear).
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With food and beverages and “miscellaneous" themselves being compound categories, it is possible that differences in basket composition in rural and urban areas might have contributed to the difference in inflation. This warrants digging one further level deeper. Figures 4 and 5 look at the components of “food and beverages" and “miscellaneous", respectively.
As we can see from figures 4 and 5, inflation in rural and urban areas is different at the individual commodity level as well. In other words, the reason rural inflation is higher than urban inflation is because prices of individual commodities are rising faster in rural areas than in urban areas.
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At a more macro level, what this data indicates is that inflation in India (especially in the last five years) has been a chiefly rural phenomenon. While the Reserve Bank of India (RBI) has moved to a formal inflation-targeting regime, it is not clear if monetary policy alone can help curb inflation, especially given the low penetration of banking services in rural areas.
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One accusation against the current RBI governor Raghuram Rajan has been that he has not cut the interest rates quickly enough, citing inflation concerns.
It will be interesting to see how his successor addresses this problem, especially in light of the rural nature of Indian inflation.
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