Migration and Inflation: How Labour Movement is Shaping Price Trends in India

Labour Migration and Rising Inflation in Southern States

The migration of labour from low-income states to high-income states in search of employment opportunities contributes to higher inflation in southern states such as Kerala and Tamil Nadu, according to a research report by the State Bank of India (SBI). The analysis of retail prices reveals that southern states exhibit a higher trend in prices for essential commodities such as vegetables, cereals, and pulses. In contrast, the Northeast and Western regions have recorded the lowest inflation rates, while the Southern and Eastern provinces have displayed higher inflationary trends.

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Post-Pandemic Inflation Trends

A comparative analysis of the post-pandemic period (FY21 to FY25) indicates that inflation declined by 3.4% in the Northeast, whereas in the Southern region, the decline was only 2.6%. This suggests that inflationary pressures in the South have been more persistent than in other areas.

Impact of Higher Taxes in Southern States

One of the primary drivers of elevated inflation in the South is the higher taxation on key consumer goods. Southern states impose higher taxes on petrol, diesel, liquor, automobile registration, and property registration, leading to increased costs.

According to the SBI report, the Southern region accounts for the highest share (30%) of sales tax collections among all Indian regions, followed by the Northern states. This taxation burden amplifies inflationary pressures in the area.

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Food Inflation and Purchasing Power

The labor migration to high-income states has strengthened their purchasing power, which, in turn, has driven food inflation. Food inflation across different income cohorts suggests that higher purchasing power correlates with increased inflation. India's Consumer Price Index (CPI) inflation moderated to a seven-month low of 3.6% in February 2025, primarily due to easing food and vegetable prices. However, inflation in larger states continues to exceed the national average. Notably, Kerala recorded the highest inflation rate of 7.3% in February, followed by Chhattisgarh at 4.9%.

Rural Inflation vs. Urban Inflation

The report highlights that rural inflation has outpaced urban inflation in nine central states, mainly due to higher food prices. The weightage of food items in the rural consumption basket (54.2%) is significantly higher than in urban areas (36.3%), leading to a disproportionate impact on inflation trends.

Interestingly, high-income states have an average food inflation CAGR of 5.26%, surpassing the national average of 5.18% from FY14 onwards. The middle-income group recorded an average CAGR of 5.03%, while lower-income states averaged a CAGR of 4.95% during the same period. This underscores the role of purchasing power in shaping inflation trends.

Tamil Nadu Records Highest Inflation, Gujarat and Punjab the Lowest

Among the 35 states and Union Territories analyzed from FY13 to FY25, Tamil Nadu consistently recorded higher inflation than the national average for nine out of the last 13 years. On the other hand, Gujarat and Punjab maintained lower inflation rates than the national average for the same period. Looking ahead, SBI forecasts CPI inflation to decline to 3.9% in Q4 FY25, averaging 4.7% for the fiscal year. Projections for FY26 suggest inflation could range between 4.0% and 4.2%, with core inflation stabilizing at 4.2% to 4.4%.

Implications for Monetary Policy

The report anticipates a cumulative rate cut of at least 75 basis points over the next policy cycle with inflation trends remaining benign. Successive rate cuts are expected in April and August 2025, with a potential resumption of rate cuts from October 2025 onwards. As migration patterns and taxation policies continue to shape regional inflation dynamics, policymakers must consider these structural factors when designing fiscal and monetary interventions.

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