Uneven Inflation: Exploring Price Differences Across Indian States
The softened CPI numbers for February 2025, with overall inflation at 3.61%, signal positive news for markets. This downward trend should encourage the RBI to consider another rate cut in its April policy meeting, which would stimulate economic activity and boost investor confidence.
An intriguing aspect of CPI statistics is the significant variance in prices across states, particularly between northern and southern parts of India. Our analysis of the CPI index (population-weighted) across two state groups with similar per-capita incomes reveals striking differences.
The northern group (Delhi, Gujarat, Haryana, Maharashtra) shows a combined index of 184.2, while the southern group (Tamil Nadu, Karnataka, Kerala, Telangana) registers at 201.2. This means that since the base year 2012, prices have increased by 84.2% in the northern group compared to 101.2% in the southern group – indicating a substantial 17 percentage point difference in cumulative inflation. Despite similar economic development levels, these states have experienced markedly different inflation trajectories.
To reduce these regional price variations, the government should consider subsidizing interstate commodity transport, ensuring food grains reach states where local production is insufficient.
This regional disparity persists when examining urban and rural segments separately. Urban areas exhibit a 16.1 point difference in cumulative inflation (northern states at 185.4 vs. southern states at 201.5), while rural areas show a pronounced 18.7 point difference (182.9 vs. 201.6).
What Explains These Regional Price Differences?
One theory attributes these disparities to state-level taxation differences. Southern states typically impose higher taxes on non-GST items like fuel products, and registration charges for automobiles in the south exceed those in northern regions. While India's CPI methodology does account for consumption differences across states, the magnitude of these interstate price variations - even for essential commodities - remains striking. Recent research provides compelling evidence of this phenomenon.
A study by researchers at the Indian Institute of Wheat and Barley Research shows that wheat prices between northern and southern states can differ by as much as 38% (2002-2019 data). Similarly, according to data from PJTAU Hyderabad, northern states pay approximately 7.2% more for paddy (?2,420 vs. ?2,258 per quintal in southern states), reflecting regional production and consumption differences.
A Path Forward: Normalizing Essential Commodity Prices
One effective approach to controlling overall inflation would be to normalize price differences for essential commodities across states. The government should identify items with pronounced interstate price variations and implement targeted measures to reduce these gaps.
Since we're examining state groups with similar per-capita income levels, market forces and factors such as affordability are unlikely to be the primary drivers of these price disparities. To reduce these regional price variations, the government should consider subsidizing interstate commodity transport, ensuring food grains reach states where local production is insufficient.
According to the 2022-2023 Household Consumption Expenditure Survey, India's Public Distribution System (PDS) loses approximately 28% of the subsidized grains. This translates to a staggering loss of about ?69,000 crore, or roughly 20 million metric tons of rice and wheat annually. Addressing this leakage could free up substantial resources to fund efficient interstate commodity transport programs.
Normalizing prices of core essentials across states would yield multiple benefits: reduced inflationary pressures, improved resource allocation, enhanced interstate economic integration, and greater equity in access to essential commodities. We will continue to explore these advantages in future posts.
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2 小时前Very insightful post. Supply chain constraints.