Suparinomics: why rural India doesn't fret over food prices

Soaring food price inflation is eating into everyone’s family budget - and forcing us to cut back on discretionary spending, right?

Well, that’s not true of everyone.

Strange as it may sound, some sections of rural India may not be terribly worse off despite rising food prices - and, in fact, their discretionary spending may be on the rise, going by trends in rural prices.

Components of the price index such as paan, supari, tobacco and intoxicants as well clothes, bedding and footwear have seen a sharper-than-overall rise in inflation in the recent past. The average year-on-year price increase for the first two months of 2011-12 was 16.7 percent for the “paan, supari, etc” component of inflation, and 15.4 percent for “clothing, bedding and footwear”.

That’s far higher than the headline inflation (9.6 percent) as well as food inflation (7.3 percent). “Fuel and light” is the only non-discretionary spend whose prices rose about as fast (16.2 percent) as the discretionary components.

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In analysing consumer prices for rural India, Firstpost considered the broad Consumer Price Index (CPI) for rural India: the CPI for Rural Labourers (CPI-RL). The labour bureau releases another set of data for rural CPI: the CPI for Agricultural Labourers (CPI-AL). But that’s encompassed in the CPI-RL.

How did this come about, and what does this trend imply?

[caption id=“attachment_30844” align=“alignleft” width=“380” caption=“Components of the price index such as paan, supari, tobacco and intoxicants as well clothes, bedding and footwear have seen a sharper-than-overall rise in inflation in the recent past. Image by Scott Dexter/Flickr”]  [/caption]

This is likely the result of two factors; better agriculture crop in 2010 than in 2009; and the contribution that anti-poverty employment schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS or more commonly NREGA) have made to improving incomes and stoking demand.

This suggests that inflation in India may be driven more by demand-side considerations than the headline index suggests.

Prices of discretionary components in the consumption basket are more likely to be driven by demand than by supply: in other words, there is more money in the hands of people in rural India.

This, as we’ve said, is likely the result of the good agriculture output in 2010-11, when agriculture GDP grew 6.6% on a year-on-year basis. Even discounting the low base effect - agriculture barely grew in 2009-10, on account of a poor southwest monsoon - this translates into healthy growth in agricultural output.

Wage-driven anti-poverty schemes NREGA have also contributed to inflation in rural India.

There’s another interesting distinction between headline inflation numbers for India as a whole and for rural India alone.Food prices have remained higher than manufactured products prices for a number of years in the headline Wholesale Price Index (WPI). Even after a recent narrowing in the divergence - food inflation has come off its highs and manufactured products’ inflation has risen - the former is still at 8.5 percent for the first two months of 2011-12, while the latter is at 6.7 percent.

The trend is rural India is vastly different: inflation in manufactured products like “paan, supari etc” (which can be compared to “Manufacture of bidi, cigarettes, tobacco and zarda” in manufactured products’ inflation of the WPI, as opposed to food articles) and “Clothing, bedding, and footwear” has risen by over 9% and over 8%, respectively.

This implies that inflation in India could perhaps be more demand-driven than the WPI inflation numbers suggest.

The reason why CPI-RL is not as closely followed as the WPI is that the base year (1986-87) is pretty dated, and the consumption basket might be very different today from the time the index was created. It might therefore be missing out items that are important today but were not present then.