India's retail inflation shot up to six-month high of 6.3% in May, after easing to a three-month low of 4.23% in April 2021. The Consumer Price Index (CPI) was higher than the Reserve Bank of India’s target range of 2% to 6% for the first time since November last year.
The increase in May was largely on account of higher fuel and food prices. Petrol, diesel prices in India have been rising over the past two months crossing Rs 100 per litre level in many cities.
The RBI has estimated an average inflation rate of 5.1% per cent for the current financial year. The RBI has been mandated by the government to maintain the crucial number at 4% in the medium term, with a 2% leeway on either side as part of its inflation target.
As per Investopedia, ‘Inflation is the rise in the price of goods and services in an economy over a certain period’.
The standard measurement of inflation is the (CPI). Components of the CPI include a ‘basket’ of certain elementary goods and services, such as food, energy, clothing, medical care, education, communication and recreation.
The different components have been assigned weights (importance) in the index in line with the average consumption basket of an individual. The weights differ for rural and urban India because of differences in consumption pattern.
Food and beverages have the highest weight of 46%, followed by housing (10%), transport and communication (9%), fuel and light (7%) and clothing and footwear (7%). This is represented in Table 1 below:
Table 1: Inflation Basket of India (figures in %)
Let’s say in a month, food and beverages prices increase by 5% in urban India. This will contribute 1.8% (36.3% weight multiplied by 5%) to increase in inflation for the month.
Similarly, if prices of housing increase by 10%, recreation and amusement decline by 10% and so on, the CPI inflation for the month would be 6.6%.
Table 2: Calculation of inflation
This also means that the purchasing power of individuals in urban India would have declined by 6.6% in the month. Unless income increases by a similar or higher amount, an individual would have to reduce his consumption of one of the items listed above.
Different states have different rates of inflation in different years. It means that the inflation you experience also depends on which part of the country you are in and the inflationary pressures it is experiencing during a particular year.
Of course, within a state, whether you are in an urban area, or a rural one, also makes a difference.
In 2019-20, among large states, Kerala had the highest rate of inflation at 6.1%. Bihar had the lowest at 2.2%. Assam had the second highest rate of inflation, followed by Uttar Pradesh, Uttarakhand and Tamil Nadu at number five in the list.
Gujarat, Himachal Pradesh, Chhattisgarh, Andhra Pradesh, along with Bihar feature in the top 5 states with lowest level of inflation.
Chart 3: Inflation across states in India (Source & Credit www.vivekkaul.com)
Inflation or price rise as it is normally called has been one of the Top 5 issues across state and central elections over the years.
The Sushma Swaraj-led BJP government is believed to have lost in Delhi due to soaring onion prices. In the recent state elections, Trinamool Congress raised the issue of rise in fuel prices forcefully in West Bengal.
Does inflation impact electoral results? The results of the 2021 state elections show a surprising trend. The incumbent governments of Kerala and Assam which have reported the highest inflation in India were re-elected.
So was the Nitish Kumar government in Bihar which recorded the lowest price rise amongst states in India. So, states with good as well as bad inflation records were re-elected.
This means there are other factors in play as well in determining electoral results in India. Inflation, which is listed among top 5 issues across polls, does not play a big role though it impacts adversely the purse of every citizen.