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Journalism of Courage
Dear Readers,
Over the past few days, several observers of the Indian economy have made the point that urban India, especially the larger mega cities, are the new areas of concern when it comes to economic activity while rural India is witnessing an uptick. In simpler terms, all this means is that people in urban India are not buying (consuming) as much stuff (be it cars or cereals) as companies expected them to buy while people in India’s rural areas seem to be doing much better than earlier.
To be sure, the Finance Ministry’s own monthly review (for September) states “Rural demand continues to strengthen in H1 of FY25”. “H1 FY25” refers to the first half (or the first six months) of the 2025 financial year — April to September. “The improvement in rural demand is reflected in rising Fast Moving Consumer Goods (FMCG) sales reported by Nielsen IQ, which grew by 5.2 per cent (volume growth) in Q1 of FY25, higher than the 4 per cent growth in the corresponding quarter of the previous year,” it further states. Again, Q1 refers to the first quarter or the first three months — April, May and June. See CHART 1 sourced from the Finance Ministry’s monthly review.
But here is a noteworthy thing: A big reason why urban India seems to be doing worse is high food inflation. Read this story in Express for more details.
But, oddly enough, if one looks at the inflation data closely, it becomes clear that high food inflation stung the rural households more than their urban counterparts.
Here’s how.
Look at TABLE 1. It details the two things one needs to know to determine who is getting hit by food inflation more.
The first is the rate of food inflation; this refers to the rate at which food prices went up over the same month last year.
The second is the weightage that food inflation has in calculating the overall inflation in rural and urban areas. Now weightage differs from person to person: If you always walk to your office and don’t own a car, then higher car price inflation will have no effect on you per se. Similarly, people who do not have kids will not face the brunt of high educational inflation. By the same logic, someone who drives for work and has four kids in the school-going cohort will be far more affected.
But the broader point is that your consumption pattern affects your inflation rate. In rural areas, food inflation tends to have a much higher bearing on overall inflation while it accounts for a smaller bit in the urban areas.
As is evident from the Table, for the month of September when inflation suddenly jumped sharply, even though the food & beverages inflation in rural India was a tad lower than urban India, its negative effect has to be more because its weightage (in the rural consumption basket) is considerably more.
“Food inflation contributed 73.1 per cent to the headline rural inflation. In contrast, food inflation contributed only 56.1 per cent of the headline urban inflation. This stark disparity is because of the disproportionately higher weight food holds in the rural consumption basket,” states a research note by CMIE’s (Centre for Monitoring Indian Economy) Economic Outlook.
Take another specific example: Vegetable prices. One can wonder that if vegetable prices go up by 10%, how does it matter whether you are in urban India or rural India?
“Vegetable inflation contributed the most to overall headline inflation. In rural and urban areas vegetable inflation was almost the same at 36 per cent and 35.9 per cent, respectively. But, the sting is different. Vegetables have a weight of 7.5 per cent in rural CPI and 4.4 per cent in urban CPI. Due to the relatively larger importance of vegetables in rural consumption, it contributed to 45.8 per cent of the headline rural inflation. In contrast, vegetable inflation only contributed 31.3 per cent to headline urban inflation,” explains the CMIE note.
Similarly when on September 14 the Union government raised the import duty hike on edible oils, it led to a rise in prices but the negative effect was more in rural areas. In urban areas, the price index increased by 2.4 per cent in September in comparison to August. But it increased by a higher 3.2 per cent in rural areas.
Lastly, look at CHART 2 to understand how food inflation rate has hovered over the two years. The analysis above has explained how rural India is worse affected even when food inflation is a tad lower than urban India. But as the red line in CHART 2 shows, often food inflation is even higher in rural India. In fact, it has been higher for most of the current financial year.
The upshot: Rural India may be consuming more at a faster rate than what it did last year, but high food inflation is still pinching it more than it is hitting urban India.
Would you like ExplainSpeaking to write on a specific topic? Do you have a query about the Indian economy, or indeed any other economy? Share it at udit.misra@expressindia.com and ExplainSpeaking will try to take a stab at simplifying it.
Warm regards,
Udit
