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Fiscal Stimulus and Potential Inflationary Risks: An Empirical Assessment of Fiscal Deficit and Inflation Relationship in India

Author

Listed:
  • Kumar Khundrakpam, Jeevan

    (Reserve Bank of India)

  • Pattanaik, Sitikantha

    (Reserve Bank of India)

Abstract

The fiscal response in India to deal with the contagion from the global crisis during 2008-10 was driven by the need to arrest a major slowdown in economic growth. However, there could be medium-term risks to the future inflation path, in the absence of timely fiscal consolidation. As highlighted in the paper, fiscal deficit could be seen to influence the inflation process through either growth of base money or higher aggregate demand. Empirical estimates over the sample period 1953-2009 suggest that one percentage point increase in the level of the fiscal deficit could cause about a quarter of a percentage point increase in the Wholesale Price Index (WPI). The paper emphasises that the importance of fiscal space in the India specific context needs to be seen in terms of not only the usual output stabilisation role of fiscal policy but also the need for use of fiscal measures to contain inflationary pressures that often arise from temporary but large supply shocks.

Suggested Citation

  • Kumar Khundrakpam, Jeevan & Pattanaik, Sitikantha, 2010. "Fiscal Stimulus and Potential Inflationary Risks: An Empirical Assessment of Fiscal Deficit and Inflation Relationship in India," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 703-721.
    • Handle: RePEc:ris:integr:0522
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    Citations

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    Cited by:

    1. Biswajit Maitra & Tafajul Hossain, 2020. "Inflation in India: causes and anti-inflationary policy perception," International Journal of Economic Policy Studies, Springer, vol. 14(2), pages 363-387, August.
    2. Basutkar, Tirupati, 2012. "Global Financial Crisis: The Monetary Policy Dilemma," MPRA Paper 70187, University Library of Munich, Germany.
    3. Sen Gupta, Abhijit & Bhattacharya, Rudrani & Rao, Narhari, 2014. "Understanding Food Inflation in India," MPRA Paper 58319, University Library of Munich, Germany.
    4. Ramu M R, Anantha & Gayithri, K, 2016. "Fiscal deficit composition and economic growth relation in India: A time series econometric analysis," MPRA Paper 76304, University Library of Munich, Germany, revised 08 Sep 2016.
    5. Mohanty, Deepak & John, Joice, 2015. "Determinants of inflation in India," Journal of Asian Economics, Elsevier, vol. 36(C), pages 86-96.
    6. Khundrakpam, Jeevan Kumar & George, Asish Thomas, 2012. "An Empirical Analysis of the Relationship between WPI and PMI-Manufacturing Price Indices in India," MPRA Paper 50929, University Library of Munich, Germany.
    7. Jaka Sriyana & Jiyao Joanna Ge, 2019. "Asymmetric responses of fiscal policy to the inflation rate in Indonesia," Economics Bulletin, AccessEcon, vol. 39(3), pages 1701-1713.
    8. Jaka Sriyana, 2018. "Inflationary effects of fiscal and monetary policies in Indonesia," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(3), pages 674-688, June.
    9. Sajad Ahmad Bhat & Bandi Kamaiah, 2021. "Fiscal policy and macroeconomic effects: structural macroeconometric model and simulation analysis," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 23(1), pages 81-105, June.
    10. M. R. Anantha Ramu & K. Gayithri, 2017. "Fiscal deficit and inflation linkages in India: tracking the transmission channels," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 19(1), pages 1-24, April.
    11. Gurleen Kaur, 2021. "Inflation and Fiscal Deficit in India: An ARDL Approach," Global Business Review, International Management Institute, vol. 22(6), pages 1553-1573, December.

    More about this item

    Keywords

    Fiscal Deficit; ARDL; Price Level;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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