New India’s Central Bank Chief to Tackle Persistent Challenge: Rural Inflation – Reuters

By Suvashree Choudhury and Rajesh Kumar Singh

SISAULI, India – The next governor of India’s central bank could gain valuable insights into persistent high prices in rural regions by traveling down a rough road in Uttar Pradesh to speak with small farmers like Dharmendra Malik.

After a decline last year, primarily due to reduced oil prices, inflation—a persistent challenge—has returned, threatening to exceed the Reserve Bank of India’s (RBI) target. This poses a difficult situation for the new chief, who is expected to be appointed soon.

Rising prices have also fueled perceptions among rural citizens that Prime Minister Narendra Modi favors the urban middle class, a critical electoral base. Recently, many government employees received substantial pay increases, while an increasing number of farmers face financial hardships.

The village of Sisauli exemplifies the challenges confronting India’s policymakers. Located three hours by rough road from New Delhi, Sisauli experiences significant difficulties and costs related to transporting goods.

The supply chain is burdened with numerous middlemen, each taking a share of the profits. Farmers report their products often pass through at least four intermediaries before reaching consumers. Malik indicates he sold rice for 16 rupees (24 US cents) per kilogram to a middleman, while it retails for three times that amount in a nearby market.

“Inflation has only decreased on paper; in reality, prices continue to surge,” commented Sudhir Kumar, a grocery store owner who monitors commodity prices through a small television in his shop.

Longstanding neglect of rural India is now giving way to rising tensions as food prices have spiked following two years of drought. Retail inflation in rural areas has consistently exceeded that of urban areas over the past 18 months, reaching 6.20 percent in June compared to 5.26 percent in cities like Mumbai. This has pushed overall inflation to a near two-year high of 5.77 percent, approaching the RBI’s target range of 2-6 percent.

RBI officials have emphasized that many contributing factors are structural and beyond the central bank’s control, yet the inflation spike could complicate the responsibilities of the incoming governor.

Although India has emerged as the fastest-growing large economy in the world, political pressure is mounting on the RBI to lower interest rates aggressively to promote full employment, which could risk further inflation.

Outgoing Governor Raghuram Rajan earned praise from investors for introducing inflation targeting last year, enhancing the RBI’s credibility by linking price management to defined goals. Investors are closely monitoring whether his successor will uphold these stringent targets or ease them.

Economists surveyed anticipate only one additional rate cut in the coming year, provided inflation does not climb sharply.

Modi’s Bharatiya Janata Party (BJP) is already facing significant electoral challenges in Uttar Pradesh next year, making the state a crucial battleground for its re-election efforts in 2024.

“You aren’t willing to pay more to farmers because it’s considered poor economics,” Malik noted. “Yet no one raises concerns when government employees receive significant pay raises.”

The government is attempting to make improvements by investing in infrastructure and aiming to reduce the influence of middlemen by enabling farmers to sell their goods via electronic trading platforms established at wholesale markets. However, progress is slow, and farmers often lack the resources to ship directly to buyers.

Interest rate cuts would offer little relief to villagers like Narpendar Jhinjha, a deeply indebted 52-year-old farmer, who fears another poor harvest will force him to sell his land.

“A farmer is hit on both sides,” Jhinjha stated, referring to low crop prices and rising costs of essential goods. “And on top of that, we have our loans to pay. Farmers are trapped in a cycle of misery.”