Reasons for the rural-urban inflation gap

Source : The post reasons for the rural-urban inflation gap has been created, based on the article “Rural-urban inflation gap: Can this puzzle be solved?” published in “Live mints” on 21st June 2024

UPSC Syllabus Topic: GS Paper3-Economy (inflation)

Context: The article discusses the issue of high inflation rates in rural India compared to urban areas. It explains that the differences in energy usage and access to LPG gas, as well as economic shifts like rural-urban migration and changes in industrial output, contribute to this inflation gap. The article also mentions how these inflation trends affect the Reserve Bank of India’s monetary policies.

For detailed information on Inflation In India read this article here

What is the current condition of inflation in India?

1. As of May, urban inflation in India is at 4.2%, while rural inflation is higher, with a gap averaging 1.3 percentage points over the last three months.
2. Rural areas experience significantly higher ‘fuel and light’ inflation, 7.5 percentage points above urban rates

What are the reasons for the rural-urban inflation gap?

1. Diverse Energy Sources: Rural areas use a variety of unregulated, locally available fuels such as coal, coke, charcoal, firewood, and dung cakes, unlike urban areas that primarily rely on electricity and LPG. This has resulted in rural ‘fuel and light’ inflation averaging 7.5 percentage points above urban inflation over the last three months.
2. Limited Access to LPG: As of 2020-21, less than half of all rural households had access to LPG, compared to over 90% in urban areas. Despite government efforts to increase LPG use through price cuts, high global energy prices in 2022 reduced LPG consumption, forcing rural households to revert to cheaper, traditional fuels.
3. Impact of Migration Trends: The pandemic triggered a significant urban-to-rural migration, which has not fully reversed. This has increased demand in rural areas, straining local supply chains and pushing up prices on items like vegetables and cereals.
4. Economic Shifts: Economic Shifts: Slow recovery in sectors like textiles, garments, tobacco, and leather, which typically account for about 15% of manufacturing and employ one-third of India’s industrial workforce, has affected rural areas significantly as these sectors have not yet reached pre-pandemic output levels. This slow recovery, combined with high migration rates from rural to urban areas, affects wage levels and spending patterns, influencing inflation rates.

Question for practice:

Discuss the factors contributing to the higher inflation rates in rural India compared to urban areas.