Retail Inflation May Be Low but Food Prices Continue to Hurt Ordinary Folks

For affluent Indians, the gap between retail inflation and food inflation makes little difference. What of the rest?

According to supporters and sympathisers of the NDA regime, the malignant ghosts of high inflation are finally being banished. On the face of it, they do have data to reaffirm this claim. Retail inflation as measured by the consumer price index has dropped to a five-year low of just about 3.5 percent in July 2024. This is literally the first time in ages that retail inflation is lower than the self-imposed “danger” mark of four percent stipulated by the Reserve Bank of India.

As regime-friendly economists would point out, such a reduction in retail inflation rate paves the way for the RBI to cut interest rates in the future; a move that would incentivise investment and consumption. Clearly, a win-win situation for the Indian economy.

Yet, beyond the jargon and the pink papers, the data doesn’t seem to provide much succour to ordinary Indians. The enthusiasm witnessed among experts is missing among citizens who live with the harsh reality of managing family budgets in these times of uncertainty. Why so?

The reason why ordinary folks are not applauding Finance Minister Nirmala Sitharaman or RBI Governor Shaktikant Das is food.

While retail inflation overall may be falling, food inflation remains stubbornly high. The accompanying chart shows how retail inflation (in red) and food inflation (in blue) have moved in 2024. The gap between the two remains significantly wide.

For affluent Indians, this divergence hardly makes any difference. Less than five percent of their income is spent on food items like cereals, pulses, eggs and meat, dairy products, vegetables, fruits and the like. But for a majority of Indians, food prices have been a source of torment since COVID struck.

Let's try to simplify the jargon revolving around the inflation rate to understand why ordinary folks shake their heads in disbelief when they are told inflation is at a five-year low. Price movements of dozens of products and services are taken into consideration while constructing what is known as the consumer price index.

As of today, food and related items constitute 46 percent of the consumer price index. For rural India, it is much higher at about 54 percent. This means that about half the monthly expenditure of an ordinary Indian family goes to food and related items. You don’t need to be an economist to figure out that if prices of food keep rising month after month, ordinary families will remain in distress.

Let’s try and simplify it even further. Say a family of four earns Rs 50,000 a month which is almost three times the per capita income of India. On average, it buys two litres of milk and six eggs a day. We know that the price of milk has gone up by Rs 10 per litre since 2022. The price of one egg too has gone up by Rs two since then. This average family is spending Rs 600 per month more on milk and Rs 360 per month more on eggs. That works out to almost Rs 1,000 more a month.

The amount looks insignificant to “experts” and analysts. But it is a torment for the family as it still has to spend on commuting, communications, house rent or EMI, electricity, school fees, and much more.

Take another data set. According to research conducted by the Institute of Competitiveness, barely 10 percent of Indians earn more than Rs 25,000 a month. Imagine the havoc that persistently rising food prices cause on family budgets when the income is barely Rs 25,000 a month.

CVoter does a Daily Tracker poll where people are asked a range of questions. One question is: how difficult do you find it to manage family/household budgets? Since COVID, more than two-thirds (often more than three-fourths) of respondents have said they find it exceedingly difficult. This is despite high GDP growth rates in the last three fiscal years.

In a previous data driven column, the author had argued how two-wheeler sales could possibly have had an impact on the 2024 Lok Sabha elections. When families earning around Rs 25,000 a month are forced to spend a lot more on food, they have little or no savings left to invest in a two-wheeler.

That is precisely what has been happening since COVID: while car and SUV sales are booming, two-wheeler sales are still sluggish. In 2018-19, about 22 million two-wheelers were sold in India. Despite a smart recovery in GDP growth, sales barely crossed 18 million in 2023-24. The top of the income pyramid is resplendent. But what about the rest?

In the madness of news cycles, most forget that a crucial difference between Modi 1.0 and Modi 2.0. During the former, the average retail inflation rate was brought down from double-digit rates in the UPA era to just about four percent. But during Modi 2.0, the average retail inflation was much higher at about six percent. And of course, food inflation has inflicted even more pain.

This, of course, will be a big challenge for Modi 3.0 in the months to come.

(Sutanu Guru is the Executive Director of the CVoter Foundation. This is an opinion article and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)