Stubborn Inflation: India Faces Economic Tug-of-War in 2024

India's consumer price inflation is expected to remain above 5% throughout 2024, spurred by rural food consumption even as urban demand weakens. A State Bank of India report highlights that food-related inflation remains high despite declining vegetable and protein prices, with imported inflation adding pressure to the economic climate.

India's consumer price inflation (CPI) is anticipated to persist above 5% for the remainder of 2024, as per a recent analysis by the State Bank of India (SBI). Despite a notable drop in November's vegetable and protein prices, inflation remains elevated due to consistent food consumption in rural areas, exerting upward pressure on prices.

The report underscores rural economies' resilience, where food constitutes a large portion of consumption, potentially prolonging food-related inflation. SBI noted that even with significant moderation in vegetable and protein prices, rural populace continues to rely heavily on food, sustaining inflationary trends.

Official data shows that in October, India's retail inflation hit 6.21%, surpassing the Reserve Bank of India's 6% upper tolerance threshold. Inflation soared to a 14-month peak due to sharp rises in food prices, which climbed by 261 basis points recently. Excluding food and energy, core CPI rose to 3.76% in October.

The report highlights that imported inflation influences approximately 40% of India's CPI. Consequently, the Reserve Bank of India is unlikely to fully transfer exchange rate volatility to consumers to curb further inflationary challenges.

Additionally, government support via increased Direct Benefit Transfers (DBT) has bolstered rural purchasing power, amplifying demand for essential goods. The report indicates the bottom 40% of DBT beneficiaries have seen spending rise by 1.85 times, maintaining rural economic vigor.

Contrarily, the robust rural economy has not entirely compensated for the slowdown in urban demand. The report attributes this to dwindling savings accumulated during the pandemic, which previously supported urban spending. Overall, it depicts a complex economic scene where rural resilience partially offsets inflationary pressures, but urban demand weakens.

(With inputs from agencies.)