Demonetisation Impact: States That Saw The Steepest Fall In Inflation

Consumer price inflation fell steeply in the month of November as prices of perishables fell in the days and weeks after the government decided to withdraw notes of Rs 500 and Rs 1000 from circulation. The currency crunch stalled transactions and forced producers to sell at discounted prices to avoid their produce going waste.

While at a national level, consumer price inflation fell to 3.63 percent in November compared to 4.2 percent in October, nine states saw a steeper fall in their inflation rates, an analysis by BloombergQuint showed. Out of the 22 states for whom state level data is reported, 16 reported a fall in inflation.

Not surprisingly, the most significant impact was seen across states where cash-transactions are large and those where food articles make up a large part of the retail inflation index.

States like Chhattisgarh, Andhra Pradesh, Tamil Nadu, Telangana and Odisha saw their year-on-year inflation rate fall by more than 1.25 percentage point. While the drop in inflation between November and October is largely being attributed to the impact of demonetisation on food prices, base effects would play some role as well.

As the chart shows, Andhra Pradesh saw its inflation come down by 2.07 percentage points in a matter of a month while Chhattisgarh's inflation fell by 1.44 percentage point to 0.44 percent.

Radhika Pandey, consultant at the National Institute of Public Finance and Policy said that demonetisation has likely impacted the food and beverages segment the worst where cash reliance is larger.

“The all-India CPI inflation eased to 3.63 percent primarily driven by a decline in food price inflation. State-wise analysis also shows a dip in inflation for 16 out of 22 states,” Pandey said. “State-wise weighing scheme for CPI shows that states that have a relatively greater weight of food and beverages witnessed a greater decline in prices.”

Data on the construction of state inflation indices bears this analysis out.

For instance, the food and beverage basket forms 58 percent of Odisha’s inflation index which is higher than the national average of 54.2 percent. This is also true for other states like Chattisgarh, Telangana and Andhra Pradesh. On the other hand, states like Himachal Pradesh which saw their inflation rise marginally are among those which have a lesser weight assigned to food and beverages sector.

“The initial level impact of demonetisation on prices would be visible in segments that are primarily cash-reliant. The transactions in food and beverages are predominantly in cash and if one sees a moderation in prices which is not generally seen from October to November in previous years, the impact can be linked to currency-ban,” said Pandey.

However, not all agree that the fall in inflation levels can be directly correlated with demonetisation. Indranil Pan, chief economist at IDFC, said that there isn’t enough data at the state level to accurately judge the drivers of a change in price levels.

“There’s been some demonetisation impact of up to 15-20 basis points that we also predicted but it’s hard to say without having breakup of baskets at the state level,” Pan said. “It’s likely that there’s been some temporary effect in cash-reliant markets but most of it is likely to be a supply shock rather than a demand downside.”