Home/ Politics / Policy/  Raghuram Rajan’s inflation fight is helping Indian cities over villages

Mumbai: From the Indian countryside, the inflation slowdown that’s enabled four interest-rate cuts this year appears less dramatic.

In August, a record gap opened up between rural and urban India in the latest inflation data series as city residents benefited more from a plunge in global oil and food costs. Bad roads, inadequate storage and fewer transport options led to higher price gains for villagers, according to HSBC Holdings Plc.

“This relative disadvantage is showing up more so now," Pranjul Bhandari and Prithviraj Srinivas wrote in a report on 19 October. “All of these point to one solution. Higher investment in rural infrastructure and meaningful reforms in rural India’s main occupation, agriculture."

Failure to contain rural inflation would make it tougher for central bank governor Raghuram Rajan to achieve his 4% CPI target by March 2018. Almost 70% of India’s 1.2 billion people live in rural areas, the highest share among emerging markets.

Since taking office two years ago, Rajan has seen success in bringing down one of Asia’s fastest inflation rates as global commodity prices fell. India’s economic growth of more than 7% has also stood out as China slows and other major emerging markets flirt with recession.

Even so, the recovery in Asia’s third-largest economy is “far from robust," Rajan said on 29 September. He cited weak rural demand after cutting rates by a steeper-than-expected 50 basis points.

Prices are rising faster in rural areas even as demand growth falls in relation to urban areas. The slowdown has been evident for several months, with rural loan growth falling to the lowest since 2002 in June while urban credit demand shows signs of a pick up from a record low.

Rural expansion of 10.5% lagged the 12% urban increase for some goods of manufacturer Dabur India Ltd., chief executive officer Sunil Duggal told analysts in July. P.B. Balaji, chief financial officer at Hindustan Unilever Ltd. — India’s biggest maker of soaps and detergents — told an 14 October conference call that the rural demand outlook “continues to be uncertain."

The dichotomy of weak demand and fast inflation in rural India is because inadequate investment has led to entrenched bottlenecks, lowering potential growth, according to HSBC. Consecutive years of insufficient rainfall has made things worse.

Prime Minister Narendra Modi, who faces a series of state elections in coming months, has struggled to balance the two. While his moves to limit wage increases and guaranteed food prices in government programs have helped contain inflation, demand has suffered.

“Rural income has been badly affected," Kunal Kundu, an economist with Societe Generale SA in Bengaluru, said by phone. “We do expect rural demand to remain poor." Bloomberg

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Updated: 21 Oct 2015, 09:26 AM IST
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