MoF scans retail inflation variations across states

The finance ministry has initiated a comprehensive assessment of retail inflation rates to identify reasons for sharp interstate variations and firm up possible remedial measures, people familiar with the development said.

The ministry may share its findings with states and suggest corrective steps for those that are witnessing consistently high price pressure. The findings could also encourage states that are already doing well to do even better, they told ET.

In the first half of this fiscal, retail inflation in 22 out of 35 states and union territories—including Maharashtra, West Bengal, Delhi, Gujarat, Punjab, Tamil Nadu, Telangana and Uttarakhand—were lower than the national average of 4.6%, showed the official data. In 15 of them, it was less than 4%. The average inflation rate until November this fiscal year touched 4.9% and the sharp interstate variations persisted.

Given that agriculture is a state subject and food products have been the biggest driver of retail inflation in recent years, the focus is also on removing structural barriers at the states’ level, the people said.

This is part of the broader supply-side efforts to bring down retail inflation to the 4% target on a sustained basis, they said.

The Reserve Bank has, especially in the past two monetary policy reviews, resisted pressures to cut rates, holding that the war against inflation wasn’t yet over.

“It’s high time we nudged states (especially those that witness high inflation consistently) to bring in credible reforms, especially in farm marketing,” said one of the people.

Based on a preliminary assessment, ministry officials reckon that states with limited crop output are prone to elevated price shocks due to additional logistics costs involved in supplying to those regions.

Similarly, they feel varying consumption patterns across states, differences in fuel prices—often due to variations in local taxes and subsidies—and other factors like geographical terrains, supply chain disruptions, natural calamities and regional policies can potentially weigh on retail inflation at state levels.

Pranjul Bhandari, chief economist (India and Indonesia) at HSBC, told ET: “Broadly speaking, economic growth, efficient food management, logistics reforms and the size of states are among the factors that can drive inflation”.

Some states that are growing faster than their historical averages, such as Uttar Pradesh and Odisha, are witnessing higher retail inflation, as their economies are adjusting to the new expansion rates, which can be viewed as “positive”, she said.

“Similarly, states that are key producers of commodities or pursue reforms in food management tend to curb inflation better,” Bhandari said. Maharashtra, Punjab and Karnataka, for instance, have undertaken farm marketing reforms.

Smaller states, such as Goa and Delhi, too see lower inflation on the back of easier transportations, Bhandari said.

Pushing for greater state-level reforms and scrutiny, some of the people cited the example of Indonesia, which has been able to keep a lid on inflation, especially the price pressure in the usually-volatile food segment.

“It went province by province, undertook reforms and overhauled the food logistics system. It awarded provinces that curbed food inflation and fostered competition among them to do better,” one of them said.