What’s Feeding Inflation in India
Current Situation:
- The inflation rate for products is declining globally as input costs and demand decline. However the cost of things is increasing in India.
- Services inflation is still high globally despite the fact that demand for high-touch services is growing more slowly than expected. Inflation for services is declining in India.
Urban demand growth as an inflation driver:
- The beginning of it all was the decline in rural consumer expenditure in the latter half of 2021.
- During 2022, the monsoon rains proved unreliable, inflation picked up speed, and the March heatwave spread, resulting in a subpar harvest and a severe hit to rural earnings.
- Demand in cities increased throughout this period. Lockdowns ended, and urban jobs returned. Workers who had left for home during the pandemic era came back to the major cities.
- In India, earnings increased every time a worker relocated from a rural to an urban area. Increased salaries meant strong consumption. In light of this, the rural demand deficit became even more apparent.
- Winter agricultural sowing increased in 2022’s final few months. Agricultural salaries increased as more workers were required on the ground.
- In fact, once inflation was taken into account, they surpassed pre-pandemic levels. Other rural indicators also indicated higher revenues, such as the manufacturing of consumer non-durables, which increased quickly from October levels.
- By the end of 2022, the change in labourers returning to the cities and the resulting growth stimulation were practically ended. After that, indicators of urban demand, like the production of durable goods for consumers, started to decline. Fair enough, rural demand is just marginally increasing while urban demand is a little bit declining. Both are hardly dramatic. But it’s obvious that things are gradually changing.
Condition of the Informal Sector:
- Around 80% of India’s labour force is employed in the informal sector, which includes both agricultural and non-agricultural employees equally.
- A series of economic shocks have hit businesses in the unofficial sector:
- Lockdowns came first, followed by an increase in commodity prices.
- Small businesses underperformed large businesses during the epidemic, losing market share, turning a loss, and paying their employees less. The informal small businesses suffered the most.
- The prospects for small businesses have gotten better in recent months as a result of ending the lockdowns and the spike in commodity prices from a year ago. High input costs are no longer as burdensome, and staff salaries at these companies are gradually increasing. Increasing production of non-durable consumer goods is one indicator that suggests that informal sector incomes are rising.
Connections between the rural and unofficial sectors:
- In one sense, we use the terms nearly interchangeably since there are substantial connections between the rural and informal sectors.
- First, around three-fourths of the informal sector employees in the nation reside in rural India.
- Second, a large portion of the food that rural Indians eat is made in the unofficial economy.
- But, it’s also crucial to remember that 25% of informal labourers are located in metropolitan areas of India, where their living standards are also rising.
How will the patterns of demand for goods and services in the rural and unorganised sectors change?
- In rural areas, 20% of households are landowners (own more than one hectare of land). They rely heavily on agriculture for their livelihood.
- On the other hand, wages account for a large portion of the income for the 80% of households with landless status (holding less than one hectare of land).
- Their salaries are divided between agricultural work (which accounts for about 40% of households) and non-agricultural work (the remaining 40 per cent of households).
- Every one of these groups was performing poorly up until six months ago. Now
- It has been noted that consumption in the rural and informal sectors is more heavily weighted towards commodities than services, as well as consumer non-durables than consumer durables.
- Also, manufacturers are utilising this chance to increase profit margins following last year’s significant losses. This explains why retail inflation hasn’t decreased as much as wholesale inflation and why manufacturing profit margins are increasing more quickly than service provider profit margins.
- Most notably, it explains why the inflation rate for products is higher than that for services.
- The primary cause of the overall products demand exceeding the demand for services is the rise in more goods-heavy demand from the rural and unorganised sectors.
Conclusion:
- Inflation in FY24 is anticipated to be higher than what most people are now anticipating in either case (the consensus of estimates).
- The rate-setting strategy of the RBI may be affected by this. We predict that the Fed’s activities, global inflation, and any potential pressure on the rupee will have a significant impact on the RBI’s rates during the next sessions.
- According to estimation, domestic inflation might not offer much breathing room either. The point is well-made. Prepare for additional RBI rate increases over the upcoming months.
