Do people in rural India lead the same lives as in urban areas? The answer is a clear no. This affects the pattern on consumer buying and thus, has a say in inflation in both the areas. This is why there are two separate indices for rural and urban inflation. Each of these indices considered a basket of products across multiple categories like food, fuel, transport and so on. However, what forms these baskets and the weights they have in the final index numbers, differ for the two regions. For example, food has a weight of 54.18% in the CPI rural index and only 36.29% in the urban index. Also, the urban index takes into consideration housing prices that are not a part of the rural index. These variations affect the final numbers drastically.
Not all products see similar trends in inflation. Some may see a slow rise while another may see drastic periodical jumps. This may seem like small variations but can affect an index in a big way. Fuel is one of the key reasons behind the difference in Urban and Rural inflation. The Urban index, on the other hand, concentrates on the more widely used LPG and diesel. The prices for these have fallen because of low global prices.
Ironically, food products are somewhat costlier in rural India than in urban India. One reason is the drought-like conditions, which could have driven up prices. However, India has been importing food products, which have fallen in price internationally. Despite this, prices of food products have not fallen in rural India. A more stubborn price trend is observed in vegetables and oil seeds.
Rural India suffers from poor infrastructure. This leads to bottlenecks in responding to supply shortage in food items. Inadequate distribution channels hinder bringing imported vegetables and oilseeds to rural areas, many experts say. This is referred to as a supply side constraint. This is one area where RBI is unable to do much and the government has a bigger role. Better roads and rail network is the way out.
Inflation has a big effect on growth. This is because people can tighten their purse strings. Lower demand can certainly slow economic growth. Inflation is higher in rural areas, not just for fuel and food, but for core products too. This could reflect the fall in rural India's growth potential. And there could be three reasons behind this fall-poor investment, bottlenecks and two droughts. This affects the supply of products, thus causing inflation.
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