WHAT’S FEEDING INFLATION IN INDIA
Present circumstances:
∙Globally, the rate of product inflation is decreasing as demand and input costs go down. Yet, India is
experiencing rising prices.
∙Despite the fact that demand for high-touch services is increasing more slowly than anticipated,
services inflation is nevertheless significant globally. In India, the cost of living is decreasing.
Urban demand growth as a source of inflation:
∙The decrease in rural consumer spending in the second half of 2021 marked the beginning of
everything.
∙The inconsistent monsoon rains, increased inflation, and the spread of the March heatwave during
2022 led to a mediocre harvest and a significant decline in rural income.
∙Around this time, demand rose in urban areas. Lockdowns ceased, and employment in cities resumed.
During the epidemic era, workers who had fled for their homes returned to the big cities.
∙Every time an Indian worker moved from a rural to an urban region, their earnings climbed. Rising
salaries correlated with high expenditure. This made the demand shortfall in rural areas even more
obvious.
∙The latter few months of 2022 saw an upsurge in winter agricultural sowing. Since more labour were
needed on the ground, agricultural pay rose.
∙In fact, after accounting for inflation, they went above pre-pandemic levels. Other rural indicators,
such as the manufacturing of consumer non-durables, which grew swiftly from October levels, also
pointed to stronger revenues.
∙By the end of 2022, the shift in labourers moving back to urban areas and the ensuing growth stimulus
had essentially come to an end. Following that, indices of urban demand, such as the manufacturing of
consumer durables, began to fall. Fair enough, demand in rural areas is only slightly rising while it is
somewhat decreasing in metropolitan areas. Neither is especially dramatic. But it’s clear that things are slowly evolving.
The state of the unorganised sector:
∙The informal sector, which covers both agricultural and non-agricultural workers equally, employs
about 80% of India’s labour force.
∙Businesses in the unofficial sector have been impacted by a number of economic shocks:
∙Lockdowns started initially, and then commodities prices rose.
∙Throughout the epidemic, small firms underperformed big businesses, losing market share, making a
loss, and paying their employees less. The casual small enterprises were hardest hit.
∙Due to the end of lockdowns and the rise in commodity prices from a year ago, the outlook for small
firms has improved recently. High input costs are no longer as onerous, and these businesses are
gradually raising employee compensation. One sign that implies that incomes in the informal sector
are increasing is the expanding production of non-durable consumer items.
Links between the unofficial and rural sectors:
∙Since there are many linkages between the rural and informal sectors, we sometimes use the terms
interchangeably.
∙Secondly, rural India is home to almost three-fourths of the nation’s unofficial sector workers.
∙Second, the food that rural Indians consume in vast quantities is produced in the unofficial sector.
∙Yet, it’s also important to keep in mind that 25% of informal workers are found in India’s cities, where
their level of living is also rising.
What changes may be expected in the ways that goods and services are demanded in the rural and unorganised sectors?
∙20% of households in rural areas are landowners (own more than one hectare of land). Their primary
source of income is agriculture.
∙On the other hand, for the 80% of households with landless status, earnings make up a sizable amount
of revenue (holding less than one hectare of land).
∙Between non-agricultural work, which supports roughly 40% of households, and agricultural work,
their earnings are split (the remaining 40 per cent of households).
∙Before six months ago, each of these groups was underperforming. Now
∙Consumption in the rural and unorganised sectors has been shown to be more heavily skewed towards goods than services and consumer non-durables than consumer durables.
∙Also, manufacturers are taking advantage of this opportunity to boost profit margins after last year’s huge losses. This explains why manufacturing profit margins are rising faster than service provider
profit margins and why retail inflation hasn’t fallen as much as wholesale inflation.
∙It explains why the rate of inflation for goods is higher than that for services, in particular.
∙The rise in more goods-heavy demand from the rural and unorganised sectors is the main reason why
the overall demand for products is greater than the demand for services.
∙Conclusion:
∙In either event, it is projected that inflation in FY24 will be higher than what most people are currently
forecasting (the consensus of estimates).
∙This could have an impact on the RBI’s rate-setting policy. We anticipate that the next few sessions
will have a substantial impact on the RBI’s rates due to the actions of the Fed, global inflation, and any
potential pressure on the currency.
∙Estimates indicate that domestic inflation may not provide much breathing room either. The argument
is convincing. In the coming months, be ready for further RBI rate increases.
