Gap Widening between urban and rural India

According to the recently released data by HSBC global research, the gap between rural and urban inflation has more than doubled over the last one year. Although the inflation has been slowing both in rural and urban areas of the country, there is a widening difference between the two as rural inflation is decelerating at a much slower pace.

Inflation has fallen strikingly over the last several months, but the gains are not equally distributed. Rural inflation is running higher than urban inflation and its underlying trend is higher than the RBI’s target, while the urban inflation momentum has slowed to 4.5%, which is lower than the Reserve Bank of India’s target level of 6%. The trend in price gains in rural India, however, is running at 6.5%. The difference between rural and urban inflation is most stark for fuel and transportation, followed by core and to a lesser extent food. Despite two successive years of drought, overall food inflation in India has remained tepid, as low global prices have made it possible to import food products that are in short supply. Rural Indians, however, do not seem to have benefited as much from food imports as their urban counterparts.

Higher investment in rural infrastructure and meaningful agricultural reforms are needed to make growth weather proof and put it on a higher, more sustainable path to enable the RBI to meet its 4% inflation target sustainably.