India’s Retail Inflation Rises, Industrial Production Dips

Economic Challenges More Severe for Rural Households

Newsreel Asia Insight #103
Jan. 14, 2024

Retail inflation in India climbed to a four-month high in December 2023, accompanied by a decline in industrial production, as revealed by data from the National Statistical Office. We have analysed these figures to explain their impact on you.

Lately, you might have noticed that your regular basket of goods – pulses, spices, fruits and vegetables – is costing you more. In December, India saw a significant rise in retail inflation, reaching 5.69%, The Indian Express reported, citing the government data. This means that on average, prices are higher than they were a year ago. For you, this translates into spending more on the same amount of food.

The situation is more pronounced when you look at specific items. For instance, vegetable prices surged by a whopping 27.64% in December. If you’re fond of pulses and spices, these too have become pricier, with inflation rates soaring over 20%. This isn’t just about the essentials becoming harder to afford.

In India’s rural-urban divide, both areas are feeling the pinch, but in different ways. Rural retail inflation rate stood at 5.93% in December, slightly higher than urban inflation at 5.46%.

Rural households are typically more dependent on agriculture for their livelihoods. This means their income and expenses are closely tied to the prices of agricultural commodities, like crops and livestock. When these commodity prices fluctuate, either due to environmental factors like weather or market dynamics, rural incomes can be directly affected.

For example, if the price of a key crop falls, farmers earn less, reducing their ability to spend on other necessities. Conversely, if the prices of essential commodities they need to buy (like seeds, fertilizers, or even daily consumer goods) increase, their living costs go up, but without a corresponding rise in income.

In urban areas, the economy is usually more diversified. People have a wider range of jobs that are not as directly affected by agricultural commodity prices. Urban areas often have better access to markets, services and infrastructure, which can help moderate the impact of inflation.

Therefore, the slightly higher inflation rate in rural areas as compared to urban areas indicates that rural households might be facing more severe economic challenges.

Looking at the state-wise scenario, some states like Gujarat and Rajasthan are experiencing higher inflation rates. This regional variation means that the economic experience is not uniform across the country. Your experience in Delhi might be different from someone living in Gujarat.

However, the country’s “core inflation,” which excludes food and fuel, has actually eased to 3.9%. It suggests that, overall, prices for a wide range of goods and services are not increasing as rapidly as they might have been. This could mean that everyday items like clothing, household goods and recreational activities are becoming more affordable, or at least not getting more expensive as quickly.

At first glance, this seems like positive news. However, this decrease in core inflation can also be a sign of a broader economic issue: subdued demand, which refers to the desire and ability of consumers and businesses to purchase goods and services. When demand is high, it often leads to increased prices, as suppliers can charge more for their products. Conversely, when demand is low, price increases tend to slow down, as suppliers compete for fewer buyers.

A drop in core inflation to 3.9% might indicate that consumers and businesses are spending less. This could be due to various reasons, such as lower income growth, uncertainty about the future or a lack of confidence in the economy. When people and companies cut back on spending, it leads to a decrease in demand for goods and services, which in turn slows down price increases.

If this trend is due to reduced demand, it could signal a slowing economy. Lower demand can lead to reduced production, which may result in fewer job opportunities and slower wage growth. This can create a cycle where people spend even less because they are earning less or are uncertain about their financial future, further slowing down the economy.

Turning to the industrial sector, the picture is equally concerning. The Index of Industrial Production, a measure of factory output, fell to a low of 2.4% in November 2023. This slowdown in manufacturing, mining and capital goods production has ripple effects. It can lead to fewer job opportunities and slower wage growth, affecting your income and job security.

The industrial slowdown has sector-specific impacts too. For instance, the consumer durables sector, which includes items like refrigerators and washing machines, saw a decline. This might lead to fewer choices and potentially higher prices for these goods in the long run.

But we should look beyond the immediate impact. These economic indicators have long-term implications. The Reserve Bank of India (RBI), responsible for managing the country’s monetary policy, keeps a close eye on these trends. The prolonged period of inflation above the 4% mark might prompt the RBI to adjust interest rates, affecting everything from home loans to savings accounts.