Retail inflation affected bottom 20% of rural India more, shows CRISIL data

While the headline retail inflation gives a broad picture of price rise, its impact on different income classes needs to be gauged.

Data computed by CRISIL shows that its impact on the bottom 20 per cent of the rural population was lesser than the upper 20 per cent and middle 60 per cent in the first five months of the calendar year 2021. Later, particularly after April 2022, it started affecting the bottom 20 per cent of the rural population more with a few exceptional months. However, in March 2023, its impact on the bottom 20 per cent and the middle class was equal but a bit less than the upper 20 per cent.

The impact of inflation on different income classes depends on their consumption pattern and the weight of those items in the consumer price index.

Dipti Deshpande, principal economist, CRISIL Ltd, said the variations of inflation on different classes can be broadly attributable to three factors -- trends in food inflation in respective months, trends in fuel inflation including transportation costs, differential weights of food and fuel inflation (the key components) under rural and urban and also across the income classes.

"For instance, food has a higher weight in the rural index vs urban. It also has a higher weight for the bottom 20 per cent versus the top 20 per cent," she said.

The bottom 20 per cent of the rural population spends 60.32 per cent of its total monthly expenditure on food, according to data provided by household consumer expenditure in India for 2011-12. Till April 2021, food inflation was quite low in rural India in the range of 1.11-3.94 per cent. But after that, it started rising with a few exceptions.  

It touched a peak of 8.53 per cent in September 2022, followed by 8.5 per cent in April 2022. Both these months saw the bottom 20 per cent of the rural population having a higher impact than the two other classes. For instance, 20 per cent of the poorest households had 8.5 per cent inflation in April 2022 and 7.8 per cent in September 2022.

Inflation in the other two classes in rural India was also high in these two months but a bit less than the bottom 20 per cent. For instance, the middle 60 per cent had 8.4 per cent inflation in April, and the top 20 per cent 8.3 per cent. Similarly in September 2022, the middle 60 per cent had the rate of price rise at 7.7 per cent and the top 20 per cent at 7.3 per cent.

Part of the reason for this could be that the middle 60 per cent spends 56.80 per cent of its total monthly expenditure on food and the top 20 per cent 44.51 per cent.

As food inflation came down to 4.66 per cent in March 2023, from 6.60 per cent in the previous month, the impact on the bottom 20 per cent and middle 20 per cent cooled off, though it is not much less than the effect on top 20 per cent. Both the bottom 20 per cent and the middle 60 per cent saw the inflation rate coming down to 5.5 per cent in March 2023 from 6.8 per cent in February 2023. The top 20 per cent witnessed a fall in the inflation rate to 5.6 per cent in March 2023 from 6.6 per cent in February 2023.

In urban India, the bottom 20 per cent has been facing higher inflation than the two other classes since February 21 with a few exceptional months. Even March could not provide much relief to this pattern in urban India even as inflation in general cooled off.

Even in March 2023 bottom 20 per cent in urban India saw inflation at 6.1 (coming down from 6.3 per cent in February), middle 60 per cent saw it falling to six per cent from 6.2 per cent. Only in the top 20 per cent, it fell to sub-six per cent at 5.9 per cent in March 2023 from 6.1 per cent in February 2021.

A CRISIL note said inflation faced by each income class moderated in March. Rural inflation across income segments moderated more sharply than urban inflation due to softening food prices. But still the urban poor face a higher inflation burden than their rich counterparts as fuel inflation remains considerably higher than core inflation.

In urban India, the bottom 20 per cent spends 57.75 per cent of its monthly expenditure on food items, while the middle 60 per cent incurs 48.3 per cent of its total monthly expenditure on food. The top 20 per cent spends just one-third of its monthly expenditure on food items.

The bottom 20 per cent depends on a higher proportion of its expenditure on fuel items at 10.41 per cent than 7.7 per cent by the middle 60 per cent and 4.89 per cent by the top 20 per cent.

The top 20 per cent spends an overwhelming 62 per cent on items that constitute core inflation (which does not include food and fuel items). Core inflation fell to a 10-month low of six per cent in March 2023 from 6.4 per cent in the previous month.