Inflation numbers might add to government’s policy dilemma

Hindustan Times
September 13, 2019
Roshan Kishore

India’s benchmark inflation measure, the Consumer Price Index (CPI) grew at 3.21% in August 2019, six basis points more than the 3.15% growth in July 2019. One basis point is one hundredth of a percentage point. Retail inflation has been growing steadily since January 2019, when it reached its second lowest value (under the new series) of 1.97%. To be sure, the headline inflation number is still less than the Reserve Bank of India’s comfort level of 4%, which guides India’s monetary policy. These numbers are also significantly less than what they were when the first Narendra Modi government completed 100 days in office. Annual growth in CPI was 6.39% in August 2014.
However, there is a peculiarity to the current trajectory of rising inflation in India. This is the growing divergence between urban and rural inflation. Since January 2012, the earliest period for which there is monthly inflation data under the current series, rural and urban inflation broadly moved in tandem. However, this parity seems to have come to an end in the recent period. Since January 2019, urban CPI growth has been almost double that of rural CPI. 



It is food prices which are driving this divergence between rural and urban 
inflation.

In November 2018, retail food inflation in both rural and urban areas was -1.7%. For August 2019, rural food inflation is 0.9% while the urban equivalent is 6.42%. The sub-category of food and beverages has been considered for food inflation here. Such divergence in rural-urban inflation is unprecedented.

Abhijit Sen, former member of the Planning Commission, said that one way to look at the growing rural urban food price divergence is to think that rural producers are getting an increasingly smaller share of what urban consumers are paying, but because wholesale food prices have also been rising with urban retail food inflation, this is not very likely, said Sen. The Wholesale Price Index for primary food articles has grown at more than 6% for the past four months. The other possibility according to Sen is that goods are stuck in rural markets, which could be leading to a scarcity in urban areas. This he said could be a result of crisis of liquidity with rural middlemen due to policies as imposition of TDS on withdrawals of more than Rs 1 crore in a year and making cash transactions of more than Rs 2 lakh illegal.
HT reported on 11 September that the government is considering exempting certain sectors from the cap on withdrawals of more than Rs 1 crore. The story also quoted traders saying that farmers had been adversely affected due to this policy.
The divergence between rural and urban inflation will add to the policy dilemma in an already difficult situation in the country, said Himanshu, an associate professor of economics at the Jawaharlal Nehru University. Subdued inflation in rural areas suggests that incomes have collapsed and people are not even being able to afford even basic items. But a rapid growth in urban inflation will become a concern, especially since crucial assembly elections are around the corner, he added.
Any policy which tries to stimulate incomes in rural areas or control inflation in urban areas will hurt the other region, and will be a big dilemma for policy makers, he explained.
A Mint story by Sayantan Bera on September 12 presents anecdotal evidence for the collapse in purchasing power of the poorest sections of the population in rural areas.
The Ministry of Statistics and Programme Implementation also released Index of Industrial Production (IIP) or factory output numbers for the month of July 2019 on Thursday.
IIP growth in July jumped to 4.3% from 1.17% in June 2019. This is good news as it could signify a turnaround in economic activity after GDP growth reached 5% in the quarter ending June 2019.
To be sure, IIP growth was 3.18% and 4.55% in the months of April and May this year. Still, manufacturing growth was just 0.6% in the June quarter.

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