8/30/2016

Whatisbehindinterstatedifferencesininflation?PrintViewLivemint

Print Close
Tue,Aug302016.0146AMIST

Whatisbehindinterstatedifferencesininflation?
Considerabledifferencespersistacrossstatesintermsofretailinflation,mostlyonaccountofruralfoodpricerise
Mumbai:Withconsumerpriceinflationfastemergingasthefocal
pointofmonetarypolicymakinginIndia,perhapsitistimetodelve
intothenotsoinsignificantdifferencesininflationacrossstates.
Tobeginwith,inflation,bothretailandwholesale,hasriseninrecent
months.Thishasraisedconcernsaboutthescopeoffurtherinterest
ratecutsinthenearfuture.
AllIndiaretailinflationisnowata23monthhighof6.07%yearon
year,abovetheupperboundoftheReserveBankofIndias(RBIs)
inflationtarget.

Withinfoodprices,itwasmainlypulseandvegetableprices
whichledtheriseinprices.Photo:PradeepGaur/Mint

HowevertherearefivemajorstatesAssam,HimachalPradesh,
Kerala,TamilNaduandUttarakhandwithinflationbelow5%inJuly
2016thatis,belowthetargetsetbyRBIforMarch2017.
Ontheotherhand,inflationisnowmorethan6%in11ofthe23
majorstatesandUnionterritories(includingGoaandDelhi).

Therefore,itmightbeusefultoknowwhatiscausingthedifferencesacrossstates.
Datafromtheministryofstatisticsandprogrammeimplementation(MOSPI)showsthattheinterstatevariationininflationismostlyarural
phenomenon,withmuchofitbeingdrivenbydifferencesinruralfoodinflation.
Thecurrentseriesofconsumerpriceinflation,withyear2012asthebase,consistentlyshowstheinterstatevariation,orstandarddeviation
inruralinflation,tobehigherthaninurbaninflation.
Notonlydoesruralinflationvarymoreacrossstates,itisalsogenerallyhigherthanitsurbancounterpartineachstate.Moreover,stateswith
higheroverallinflationalsotendtoexhibitawiderruraltourbaninflationgap,withruralinflationexceedingurbaninflation.Toillustrate,a
scatterplotofoverallinflationfordifferentstatesagainsttheirratioofruraltourbaninflationrevealsapositivecorrelation.
Toelaborate,thedifferencebetweenruralandurbaninflationismuchwiderinstateswithrelativelyhigherinflation,namely,Odishaand
Gujarat,comparedwithstatesthathaverelativelylowerinflation,namelyAssamandHimachalPradesh.
Also,incaseofstateswithrelativelyhigherinflation,itismostlyruralfoodinflationthatisdrivingtheruralurbangapinthosestates.
RuralfoodinflationexceededurbanfoodinflationinthefourmajorstateswhichwitnessedthehighestoverallinflationinJuly2016.Itmeans
thatruralinflationwouldhavestillexceededurbaninflationinthesefourstateseveniftheruralconsumerpriceinflationbaskethadthe
sameweightassignedtofoodasitsurbancounterpart.
ThedivergenceinzonewiseruralfoodinflationinIndiaisnowthewidestsinceatleastJanuary2014,whenmeasuredbytheabsolute
differenceininflationbetweenthemaximumandminimumfoodinflationacrossthesixzones.
Currently,ruralfoodinflationinthewesternzone(Gujarat,Maharashtra,GoaandotherUnionterritories)isestimatedtobearound11.3%
yearonyear,comparedtoanestimated3.9%yearonyearruralfoodinflationinthenortheast.
Withinfoodprices,itwasmainlypulseandvegetablepriceswhichledtheriseinprices.Whilepulsepricesroseinalmostallstates,what
differentiatedthelowinflationstatesfromthehighinflationstateswastheinflationinnonpulsefooditems.Inmanyofthenonpulsefood
items,thelowinflationstatesfaredmuchbetterthatis,showedaslowerpriceincrease.

http://www.livemint.com/Opinion/ZlwRDZBUfERJzVrc8t9ukO/Whatisbehindinterstatedifferencesininflation.html?facet=print

1/2

8/30/2016

Whatisbehindinterstatedifferencesininflation?PrintViewLivemint

Thus,theinterstatedifferencesininflationappeartobeattributabletodifferencesinruralinflation,whichinturnislargelyonaccountof
differencesinruralfoodpriceinflation.Nowthequestionarisesis,whatiscausingvariationinfoodpricesacrossstates?
Thevariationininflationacrossstatescouldbepartiallyattributabletointerstatetransportationcostsandtothedifferencesintaxregimes
acrossstates,whichoftenimpedeequalizationofpricesacrossregions,saidRajeswariSengupta,professorofeconomicsattheIndira
GandhiInstituteofDevelopmentResearchinMumbai.
Dostatewisedifferencesinruralwagesexplainthedifferencesininflation?
Primafacie,thereexistsonlyaweakpositivecorrelationbetweenthestatewiseriseinruralwagesandstatesruralinflation,asmeasured
bytheconsumerpriceindexforagriculturallabourers,withbaseyearas1983.
Correlationdoesnotnecessarilyimplycausation.Moreover,thecorrelationgetsweakerifweusetheruralconsumerpriceinflation
accordingtothenewseries,thatiswithbaseyearas2012.Thepossibleimpactofruraljobguarantee,thatistheMahatmaGandhiNational
RuralEmploymentGuaranteeScheme(MGNREGS)onruralinflation,byraisingruralwagesandhencecostoffarminputs,hasbeena
matterofmuchdebate.
However,MGNREGSmaynothavebeentheonlyfactorpushingupruralwages,asnotedbya2012RBIoccasionalpaperauthoredbyG.V.
Nadhanael.Accordingtothepaper,theriseinruralwagespost2007canbeattributedtoashiftinlaboursupplyfromagriculturaltonon
agriculturalwork,likeconstructionandservicessegment.
Meanwhile,thedropinlabourforceparticipationratesofwomenalsocontributedtotheriseinruralwages.
Suchariseinruralwagescouldbeoneofthefactorsresponsibleforhigherinflationaswagesimpactprices(by)feedingintocostof
productionasarguedbytheRBIoccasionalpaper.However,thecausalitymightoftenrunintheotherdirection,asnotedbythepaperitself,
whennominalwagesadjustedtoriseinprices.Thus,itisasyetdifficulttosaywhetherornotruralwagesarethedrivingforcebehindrural
inflation.Ifnot,thenwewouldhavetosearchsomewhereelsetofindcluesonwhatiscausingdifferencesinruralinflationacrossstates.
Giventhenotsoinsignificantvariationininflationacrossstates,furtherattentionandresearchisrequiredonthesubject.

http://www.livemint.com/Opinion/ZlwRDZBUfERJzVrc8t9ukO/Whatisbehindinterstatedifferencesininflation.html?facet=print

2/2