Authors: Aryaman Sandwar, Neha Singh, Bishnu Saha

1.    Introduction

Inflation is referred to as the general increase in price level of a commodity. It’s considered a severe macro-economic problem in India since the 1980s. Our government has constantly put efforts towards controlling it through several schemes, policies and measures ever since that. But is it that serious? It’s nothing more than a price increase of a good or service we purchase, since the price is increasing, our purchasing power may also increase and everything would be back to normal, but that’s not how it works! Inflation occurs due to several economic factors such as Increasing money supply in the economy to finance deficits, tackle a war-like situation etc. but several other non-economic variables also come into play such as Advancements in technology, Advancements in Infrastructure and even Natural calamities such as drought, flood etc. Speaking of Natural calamities, rural India has faced severe floods, heavy rains which negatively affects their production. Specifically, a 10% rise in annual rainfall increases state poverty (or inequality) by 0.38% (or 83%) in India, (Tripathi, S 2019). These factors negatively influence the cost of living and household incomes of people in rural areas. This study is aimed at how do wages get affected via inflation and how has cost of living evolved in rural India? It also provides insights on where the government lags and concludes with how they can tackle it with strong foundational strategies.

Furthermore, we would be studying how food inflation affects wages and poverty in India and how do we measure food inflation. Consumer price index(CPI) is the weighted average prices of market basket of consumer goods and services. It is a statistical estimate of how prices for goods and services consumed are varying over time. CPI is considered an important and accurate indicator for inflation in India as it measures changing prices on the consumer level for the rural, urban and combined population announced by the Central Statistical organization. We would be using CPI-Rural or CPI-R indicating consumer level inflation in rural India.

2.    Literature review

Economists and researchers across the world has argued that inflation in India should be studied by an increase in money stock against an increase in real income. A major cause of inflation in India is a rise in money stock is much more than the rise in real income (Prusty S, 2012). This is the monetarist approach as a number of researches has been carried out using this approach itself (Bhattacharya & Lodh, 1990, Chellaiah, 1993, Verma & Kumar, 1994). In the context of rural areas, supply-side factors play a significant role as rising food prices are a dominating aspect of overall inflation (Kundurthi R, Kalluru S.R., 2024, p. 471-491). Goyal (2014) classified supply shocks are dominating the inflation while demand shocks are more closely linked to output fluctuations. The vulnerability of inflation to supply shocks was highlighted by several authors, such as Gokarn (2010a), Bandara (2013), Chand (2010), Nair and Eapen (2012), and SBI (2022). However, Bhattacharya & Gupta, (2015) gave emphasis on rising wages through Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) accompanied with higher rural demand (Mohanty, 2010, 2011) which triggers a spike in food prices. They also mentioned that rising wages are the reason for higher spending, shifting people to a better quality protein-rich diet, however a study on 12 village commodities conducted by Nair & Eapen, (2012) found little evidence to support the popular view of consumption pattern towards high-value foods.

Government policies that promote rural nonfarm employment, such as investment in roads and electrification, can enhance rural incomes by increasing labour demand. NGOs can complement these efforts by providing training and resources, fostering economic diversification and sustainable livelihoods in rural areas. (Khandker, 1989)

The paper highlights that public employment schemes like NREG can increase agricultural wages, thereby improving rural incomes. Such programs create upward pressure on wages, benefiting not only direct participants but also influencing the broader rural labour market. (Berg et al., 2014). Government policies like the National Rural Employment Guarantee Act enhance rural incomes by providing guaranteed wage employment, while NGOs contribute through planning and implementation of local projects, ensuring community involvement, and addressing local needs to promote sustainable economic growth. (Hirway, 2006)

Government policies and NGOs can improve rural incomes by enhancing local agricultural performance, stimulating rural demand, and providing Business Development Services. Additionally, they can facilitate access to credit and support the organization of small and medium-scale enterprises in rural areas. (Dasgupta et al., 2004)

Government policies, like the improved implementation of India’s NREGS, raise rural incomes by increasing earnings through public employment, enhancing market wages, and boosting private-sector employment, while NGOs can complement these efforts by providing training and resources to local communities. (Muralidharan et al., 2017).

Key Themes Emerging from the Literature

Taken together, these studies suggest that rural inflation in India cannot be fully understood through a purely supply-side view or through monetarist lens. Instead, a more specific analysis involving wage dynamics and consumption changes is necessary. This article is aimed at providing a specific view on wages in rural India and how they impact social well-being.

3.    Food Inflation Dynamics

In the context of rural areas, food is the most valuable resource one can depend upon and cannot live without, but it comes with a cost. Persistent levels of food inflation are have posed a serious macroeconomics problem to the government and the people. Prior to the announcement of the flexible inflation targeting (FIT) framework, WPI metric was widely used to gauge inflation in India. The FIT framework stipulating a CPI target of 4% (with a flexible band of +/- 2%) announced by the bi-monthly Monetary policy statement by the Reserve bank of India(RBI) in April 2014(RBI, 2014a). This was formally executed in 2016.

Food items carry a significant share in CPI-R consumption basket. There also exists a significant correlation between CPI-R and CPI-C which comes out to be 0.86 due to the dominant share of food items in CPI-R and a considerable share of manufacturing items in CPI-C. This dynamic could be important as it compares the rural and national level indices and how one paves the way forward for another. The diagram below shows the year-on-year(YoY) comparison between CPI-C and CPI-R rates.

Fig 3.1. YoY comparison of Food inflation trends from FY14-FY24, base year 2012(Source: MoSPI)

As per the graph, rural inflation had a downward trajectory ranging from 9.43% in FY14 to -0.43% in FY19 but it peaked at an astonishing 11.34% in FY20. Subsequent to the adoption of FIT, the inflation measures had dipped below long-term averages, but due to supply shocks and the Russia-Ukraine war alongside COVID spiked it up (Kundurthi R, Kalluru S.R., 2024). Following the years, the government & RBI has adopted strict measures to stabilize it such as repo rate hikes, liquidity withdrawal, banned domestic food exports such as wheat and increased import restrictions on rice, sugar and onions. As a result, there was a drastic decrease in food inflation to 1.76% in FY21.

3.1    Weather Dependency

In India, around 51% of crops sown are completely dependent on monsoon, which provides 40% of the entire production (Department of Agriculture & Farmers Welfare). This means, more than half of the crops would fail if monsoon delays or observed less than usual. Historical data analysis indicate drought is one of the major reasons for spiking food prices and Mohanty (2010) argues that droughts cause more than 75% of the instance of double-digit inflation in India. In 2024, disrupted monsoons contributed to food inflation reaching 57-month highs: ~10.87% (CPI-R), with vegetables up 28% and cereals/pulses rising 8–17%(TOI). Comparing monsoon deviations with CPI-R rates from 2014-2024 gives a correlation of -0.23, which indicates a significantly weaker relationship between the two, possibly giving an inconsistent result where an increase in one might decrease the other for a short time.

3.2.  Shifts in MPCE

MPCE or Monthly per capita consumption expenditure is an important economic indicator used to track consumption expenditure or public spending on food/non-food items. It represents the average amount a person spends on their living expenses each month including clothing, food, fuel etc. Past researches has shown that consumption expenditure has increased significantly for rural areas due to growing income, better standards of living, and expecting better quality of food (Ravillian M, June 2000). As discussed in Section 3.1., monsoon delays or droughts result in bad crop yields. Income shocks on Agricultural workers or laborers often result in households in cutting their expenditure. The following figures show the composition of food and non-food items in MPCE in 2011-2012 and 2023-2024.

Fig. 3.2. & 3.3. Comparison of shifts in the distribution of food/non-food items in 2011-12 & 2023-24(Source: HCES 2023-2024)

These figures above show the shift in the distribution of food items from 47.10% in 2011-12 to 52.96% in 2023-24, out of which cereals carried the maximum share of about 10.69% in 2011-12 and processed food of about 9.84% in 2023-24. This strongly indicates that people of rural areas, in case of droughts and bad crop yields shifts their consumption basket toward processed food. Among the States, MPCE is the highest in Sikkim (Rs. 9,474). It is the lowest in Chhattisgarh (Rs. 2,927) indicating poor living standards in Chattisgarh as compared to Sikkim (MoSPI).

4.    Structural dynamics

India’s trajectory since the liberalization of 1991 has been characterized by swift economic growth and integration into global marketplaces. Central to this phenomenon is a remarkable structural transformation, wherein the economy has undergone a significant transition from its agrarian origins to being predominantly driven by the services sector. Nevertheless, this transformation, in contrast to the classical model typically observed in numerous industrialized nations, has circumvented extensive industrialization. Consequently, a considerable portion of the populace particularly those residing in rural locales has been excluded from the benefits of economic prosperity. (Ghate & Wright, 2012).

 4.1     Sectoral Imbalance and Inflation Dynamics

Although the services sector constitutes the largest proportion of GDP, its capacity to assimilate low-skilled labour from rural regions remains limited. Agriculture continues to employ a substantial segment of the population, despite its diminishing contribution to economic output. This incongruity between labour allocation and productivity underscores the enduring challenge of underemployment and informal employment, particularly among rural migrants. (Thakur et al., 2024).

In conjunction with this labor disparity, rural India is confronted with ongoing inflation and escalating living expenses. These adversities are not propelled by demand, but rather by structural inefficiencies within supply chains and infrastructure. The volatility of food prices, inadequate storage capabilities, and unreliable logistics networks intensify financial pressures on rural households. Traditional monetary policy instruments provide scant relief, underscoring the imperative for strategic investments in rural connectivity, market integration, and agricultural logistics. (Kundurthi & Kalluru, 2024).

4.2     Agrarian Crisis and Unequal Transformation

The agrarian crisis further elucidates the repercussions of uneven development. Diminished public investment in critical domains such as irrigation, access to credit, and agricultural extension services has rendered small and marginal farmers exceedingly vulnerable. Although initiatives such as the Minimum Support Price (MSP) and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) have offered some assistance, they have not substantially enhanced rural income levels or nutritional outcomes. Numerous farmers continue to rely on informal credit systems, ensnared in cycles of indebtedness. (Siddiqui, 2015; Ahmed & Varshney, 2008).

4.3     Political Economy of Growth and Regional Inequality

A salient characteristic of India’s economic metamorphosis is its regional disparity. Certain states, which have benefited from superior governance and infrastructure, have advanced markedly, while others persist in grappling with low human development metrics. This imbalance presents long-term threats to national unity, as it impacts not only income but also access to education, healthcare, and essential services. (Ahmed & Varshney, 2008).

4.3     Agricultural transformation and Reallocation

Looking forward, India’s transformation must be rendered more inclusive. Agriculture should not merely be regarded as a vestigial sector, but rather as one with considerable potential for value addition, rural entrepreneurship, and job creation. Investments in agro-processing, market accessibility, and labor-intensive industries will be crucial in recalibrating growth. India’s narrative of economic transition is both inspirational and cautionary. To guarantee sustainable development, the emphasis must shift from aggregate growth to equitable outcomes. A genuinely inclusive transformation will necessitate positioning rural India at the forefront of policy considerations thereby, bridging existing divides and ensuring that the advantages of progress permeate every corner of the nation.

5.    Focusing on MGNREGA

India’s rural development programs are complex, they require multifaceted policy interventions to address poverty and enhance rural livelihood. The Mahatma Gandhi National Rural Employment Guarantee Act plays as a crucial policy instrument in this context, aiming to provide guaranteed wage employment to rural households. However, the effectiveness of MGNREGA changes significantly on its access and delivery mechanisms. Here this article examines several key arguments surrounding policy measures, MGNREGA’s role, and the challenges in ensuring effective implementation to realize its full potential.

One of the main points is that the ability of MGNREGA to serve as a form of job security and encourage for more wide rural economic growth. The act provides crucial income support to weak households by guaranteeing 100 days of wage employment particularly during lean agricultural seasons. Furthermore, the program also focuses on creating durable assets, such as water conservation structures and rural infrastructure, which can encourage local economies and enhance agricultural productivity. The rise in labour market wages suggests that NREGA affects the rural economy not only through direct employment but also several ways such as improving non program earnings and employment. (Muralidharan et al., 2017).

However, to improve its potential we need to identify critical challenges associated to potential access and implementation. There are several systemic issues such as corruption, limiting the supply of goods and services, and delay of wage payments to the labours, these are often reducing the program’s effectiveness. Bureaucratic complication and lack of awareness among potential rural residents can also limit access, particularly for marginalized communities. To overcome these challenges, it is crucial to improve local governance structures and promote transparency and also ensure that MGNREGA reaches those who need it most. A similar point highlights that in order to optimize impact, MGNREGA and other rural development programs should converge. Integrating MGNREGA with various initiatives focused on skill development, agricultural extension, and rural entrepreneurship can create collaborative effects, which can lead to more sustainable livelihood outcomes. One of the major examples would be, providing MGNREGA workers with skills training can enable them to shift to high-paying jobs in the non-agricultural sector, which can reduce their dependence on manual labour. But this requires improving the planning of the programs (Hirway, 2006).

6.    Conclusion

Inflation in rural India is a multidimensional challenge that extends beyond simple price increases. While monetary factors like increased money supply and demand shocks have historically been emphasized, this article shows that rural inflation is significantly shaped by supply-side vulnerabilities, weather dependency, and structural constraints in agriculture and labor markets. The deep reliance of Indian agriculture on the monsoon makes rural livelihoods inherently unstable — a reality worsened by climate change and inadequate infrastructure.

Data shows a clear pattern: periods of erratic rainfall correlate with spikes in food inflation, disproportionately hurting rural households that spend a large share of their income on basic consumption. Though inflation temporarily eased post-COVID due to targeted government interventions, including MGNREGA, trade adjustments, and monetary tightening, the underlying vulnerabilities remain unresolved. Shifts in consumption patterns, rising dependence on processed food, and falling agricultural employment all point to a countryside grappling with high living costs and inadequate wage growth.

The analysis also highlights the limitations of one-size-fits-all inflation control measures. In rural India, inflation is not just a monetary phenomenon—it is deeply tied to income shocks, employment gaps, and supply bottlenecks. Thus, controlling rural inflation demands a hybrid policy approach that includes not just macroeconomic tools, but also robust investment in public infrastructure, agricultural reforms, rural employment guarantees, and local capacity building.

Programs like MGNREGA remain essential, but their success hinges on efficient implementation, transparency, and alignment with broader development goals like skill building, financial inclusion, and rural entrepreneurship. Only then can India tackle the twin challenges of rising prices and deepening poverty in its rural heartlands.

Who did what?

Aryaman Sandwar– Focused on food inflation dynamics and causes/reasons of it alongside graphical data showing trends in CPI-R and CPI-C and MPCE shift through pie charts. Also focused on secondary data on food inflation, from verified sources such as Reserve bank of India, MoSPI, Labour Bureau etc. He gave emphasis on the facts and figures regarding CPI rates and changes in Consumption expenditure predicting its impact on the rural society as a whole. As an Economics student, he worked on providing an accurate yet simple explanation carefully elaborating about all economic variables involved as per the best of his knowledge.

Neha Singh– Gave her valuable insights on Structural dynamics of inflation in Rural India and how it plays a crucial role for the development of the economy. As someone with a strong architectural background, she managed to provide useful information on how does development of Infrastructure in India responsible for inflation and how it affects the rural population.

Bishnu Saha– Worked on MGNREGA and explored the wage-price dynamics through it alongside the challenges and predictions for the future. Also provided recommendations for improvement to the government and which sector needs immediate attention.

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