Friday, 25 September 2015

Deflation in Rural Areas

Reasons:
  • One major reason for higher inflation could be the sharp fall in agricultural activities in most of the states, especially in eastern and southern parts of the country, which are staring at drought-like conditions. 
    • While the supply-side impact of a bad monsoon could show up in price levels with a lag, the higher price volatility in rural areas might explain why rural demand has already fallen
  • Second, undermining of some rural development programmes (such as the MGNREGA) in the recent past, which used to act like automatic stabilisers at the state level, could explain such divergence. 
  • Third, it is also important to analyse whether higher devolution of resources from the Centre to the states, from the current year onwards, has contributed to the demand slump in rural areas. 
    • higher devolution to the states has been accompanied by significant cuts in the Central government’s budget allocation to some flagship social sector programmes that were mainly for the benefit of the rural population. 
    • The cuts in the Central budget were made on the assumption that state governments, with their increased pool of resources, would compensate any shortfall. 
    •  However, any violation of this assumption could be a major source of the fall in rural demand. 
  • Finally, differences in public-expenditure efficiencies and monitoring mechanisms among states as well as local bodies might explain such variations in rural demand. 
  • The ambiguity surrounding the Centre- state expenditure strategies post the 14th Finance Commission recommendations could be a crucial determinant of the reduced demand..
Solution:
  •  Monetary policy, while focusing on the headline and sectoral prices, also needs to take into consideration the regional inflation perspective. 
  •  For their part, both the Centre and the states should work to ensure that rural consumption smoothens. Else, growth in India might take much longer to recover.

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