Spatial dynamics of food inflation in India: insights from club convergence analysis

This paper presents empirical evidence on the dynamics of food and beverage inflation in rural and urban India. This study aims to examine the evidence of total convergence of food and beverage inflation across different states/UTs. Exclusively, it also investigates the possibility of convergence between the rural and urban segments of each state/UT. To this end, the paper uses both annual and monthly data from January 2011 to February 2020. Annual inflation is used to rank the states/UTs based on average annual food and beverage inflation. The three best and worst performing states/UTs are reported for each year. Next, the convergence club methodology is employed on monthly data. The study finds strong evidence of multiple convergence clubs across rural and urban areas. It is also found that in around 50% of states/UTs, there is convergence across rural and urban areas. Specifically, we found three food and beverage inflation clubs in the rural segment and four clubs in the urban segment. The rural category has higher average food and beverages inflation than the urban one and the average difference between the high(low) clubs of rural and urban is 0.5 (0.15) %. The policy implications of the study suggest that the government needs to reduce the consumption and income gap between rural and urban areas as rural areas spend a large portion of their income on food components. There is also a need to integrate the rural and urban markets.