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Journal of Economic Integration 2010 December;25(4) :703-721.
DOI: https://doi.org/10.11130/jei.2010.25.4.703
Fiscal Stimulus and Potential Inflationary Risks: An Empirical Assessment of Fiscal Deficit and Inflation Relationship in India
Jeevan Kumar Khundrakpam and 
Sitikantha Pattanaik 
Reserve Bank of India
Copyright ©2010 Journal of Economic Integration
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.

JEL Classification: E31, H62, H63

Keywords: Fiscal Deficit | ARDL | Price Level
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