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Rural pinches more in high inflation states

Retail inflation has persisted above the Reserve Bank of India’s (RBI’s) inflation target for the fourth straight month, with price levels rising to an 8-year high of 8.38 per cent in rural areas in April while urban inflation was at a 18-month high of 7.09 per cent.

Written by Aanchal Magazine | New Delhi |
Updated: May 17, 2022 12:42:58 pm
Inflation, WPI inflation, wholesale inflation, WPI index, RBI, Indian expressThis is the highest WPI print in the 2011-12 series.

As retail inflation surged to an 8-year high of 7.79 per cent in April, individual states recorded a divergent trend with southern states of Kerala, Andhra Pradesh, Karnataka, Tamil Nadu, alongside Punjab and Delhi, seeing a perceptibly lower-than-national level inflation rate, while states such as Madhya Pradesh, Maharashtra, West Bengal, Telangana, Haryana, Uttar Pradesh, Gujarat and Assam trending mostly above the national level.

Retail inflation has persisted above the Reserve Bank of India’s (RBI’s) inflation target for the fourth straight month, with price levels rising to an 8-year high of 8.38 per cent in rural areas in April, while urban inflation was at a 18-month high of 7.09 per cent. Incidentally, a number of states recording higher inflation rate over the national level are displaying a higher inflation trend in rural areas as against the urban areas.

Consumer Price Index (CPI)-based inflation data for the last 11 months shows Kerala as the only state which has consistently remained below the all-India inflation level, while Telangana, Madhya Pradesh, Haryana and Jammu & Kashmir have stayed above the national level all throughout. States/UT such as Andhra Pradesh, Tamil Nadu, Karnataka, Punjab and Delhi, which had remained above the national inflation level in at least five out of the last eleven months have now trended below the national level at least for the last three months. States such as West Bengal, Assam, Jharkhand, Rajasthan which had remained below the all-India inflation till December 2021 have now picked up pace to rise above the national level in the last three months (four months for Jharkhand).

Possible reasons include the cushion of subsidies routed through the public distribution system across income levels in some of the southern states. Also, states with lower urbanisation rates end up spending more on food and fuel, while those with more urban areas end up spending a higher share on services.

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The disaggregated data reveals that most of these states, which have a higher inflation rate over the national level, are displaying a higher inflation trend in rural areas as against the urban areas. West Bengal has seen double-digit rural inflation over the last two months, while rural inflation in Assam has also topped the national level over the last three months even as urban inflation remains below the national level. Madhya Pradesh, Telangana, Haryana, Gujarat, Maharashtra and Jammu & Kashmir too have recorded a higher rural than urban inflation in the last three months at least.

Inflation rates for April-May 2021 were not considered as the government only provided state-wise indices and not inflation rates since all-India indices for these two months were imputed in 2020 due to the Covid-19 pandemic. Among states, the highest weight in CPI is of Maharashtra (13.18 per cent), followed by Uttar Pradesh (12.37 per cent), Tamil Nadu (7.25 per cent) and West Bengal (7.09 per cent).

Experts said this trend could be attributable to states with lower rates of urbanisation spending more on food and fuel, while states with more urban areas spend a higher share on services. “The first set of shocks to inflation have been broadly felt through food and fuel. Typically, poorer parts have a higher proportionate spending on food. About 60-80 per cent of the total spending in states with less urban areas or lower incomes would be on food, fuel, health and education. At the margin, there could also have been logistics-related shocks. Southern India, which has a higher per capita income than the national average could be spending more on services,” Rahul Bajoria, Chief Economist, Barclays said.

The decision to not reduce Value Added Tax on fuel in some of these states could also be an additional factor for higher fuel inflation. Services, as per the latest CPI data, have gained sharply with miscellaneous goods and services jumping to a 115-month high of 8.03 per cent in April and household goods and services rising to a 105-month high of 7.97 per cent.

There could also be the cushion of subsidies routed through the public distribution system seen across income levels in some of the southern states, especially on food items that constitute a big chunk of CPI inflation weightage. “States such as Kerala and Tamil Nadu have a strong public distribution system, wherein subsidised food may be helping cushion the impact of higher food prices,” Devendra Kumar Pant, Chief Economist, India Ratings said.

Among food items, major increases have been seen for prices of cereals, vegetables, fruits, spices, oils and fats. “Items which have price sensitivities to substitutes are gaining such as ghee prices that have been moving up with upward movement in prices of cooking oil. Also, chicken prices have gained as feedstock prices have gone up globally and after a supply-scare was seen in Andhra Pradesh, which is the hub for meat, poultry and pisciculture. Fruit prices also gained to 8.4 per cent in April as against our expectation of 7.4 per cent, which could be seen as a result of the heat wave,” Bajoria said.

Retail inflation surge – CPI based inflation rate over last one year.

Wheat, protein items (chicken in particular), milk, lemon, cooked meal, chillies, refined oil, potato, chillies, kerosene, firewood, gold and LPG are contributing to overall inflation in a substantive manner, State Bank of India Research report said. “The item-wise index indicates that inflation has crossed 20% in 18-items and 10-20% in 63-items. Contribution of items like milk, mustard oil, refined oil, wheat and LPG has crossed 20 bps each in the overall inflation,” it stated.

Among fuel, there is a steady increase in the weighted contribution of kerosene and firewood in headline inflation, reflecting the possible high fuel costs in rural areas and industrial usage. “Kerosene has seen a sharp spike, almost 35-40 per cent month-on-month increase. The household use is limited and mainly used for industrial purposes. There has been a massive drop in kerosene consumption over the last 10 years but since it is not subsidised in most parts of the country, any price movement gets reflected substantially in inflation,” Bajoria said.

The decision to ban wheat exports is unlikely to come as a major relief on India’s food inflation or on the current account balance front but the export ban is likely to exert an upward pressure on global wheat prices, with the impact to be faced disproportionately by low income developing countries. In CPI, wheat/atta from PDS has a weight of 0.17 per cent and wheat/atta from other sources has a weight of 2.56 per cent.

With inflation being seen as the biggest risk to the economy, the RBI is looking at reversing all measures – liquidity infused and policy rate cuts – taken during the pandemic over the next 1-2 years. on May 4, after an unscheduled meeting of its Monetary Policy Committee, the RBI raised the Repo rate by 40 basis points to 4.40 per cent and the CRR by 50 basis points to 4.50 per cent.

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