What is behind inter-state differences in inflation?

It wouldn’t require a lot of analysis to guess this question. It should be differences in food prices and indeed it is as per this analysis by Tadit Kundu.

In a very picturesque analysis, he shows how there are wide state-wise differences in inflation. Most of these differences are on account of food inflation:

All-India retail inflation is now at a 23-month high of 6.07% year on year, above the upper bound of the Reserve Bank of India’s (RBI’s) inflation target. 

However there are five major states—Assam, Himachal Pradesh, Kerala, Tamil Nadu and Uttarakhand—with inflation below 5% in July 2016; that is, below the target set by RBI for March 2017. On the other hand, inflation is now more than 6% in 11 of the 23 major states and Union territories (including Goa and Delhi).

Therefore, it might be useful to know what is causing the differences across states.

Data from the ministry of statistics and programme implementation (MOSPI) shows that the inter-state variation in inflation is mostly a rural phenomenon, with much of it being driven by differences in rural food inflation.

The current series of consumer price inflation, with year 2012 as the base, consistently shows the inter-state variation, or standard deviation in rural inflation, to be higher than in urban inflation.

I wrote a few days back on the need to have more regional representation at our central bank (not just regional analysis which is just superficial). One could start with a regional monetary policy committee where experts are drawn from different regions to explain what is going on at regional/local levels. This is a win-win for all as it helps the central bank become more aware of regional differences and also give chance to our regional economists who have been ignored for supposed global experts.

It is these very issues which need to be highlighted and addressed. Just looking at Pan India inflation number hardly does any justice given such large differences within states. It is actually a joke of sorts.

We have been doing economic policy for way too long from Mumbai and Delhi (and US?).  Time to get real and figure the real and regional issues which matter.


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