Fiscal deficit and inflation linkages in India: tracking the transmission channels

Abstract

Fiscal deficit and inflation are the two major macroeconomic problems confronting the Indian economy. Although it had manifested in various degrees earlier, these problems escalated after the recent global financial crisis. It has always been criticized that fiscal deficit will adversely impact the level of inflation. This critique has been proved and validated by many existing studies in the context of India. This paper strives to track the channels of transmission through which fiscal deficit has passed on and impacted the level of inflation in India. Based on theoretical and empirical literature, this study identifies four transmission channels, namely consumption expenditure channel, money supply channel, import channel and interest rate channel. By adopting structural vector autoregression model, it has been found that the fiscal deficit transmission mechanism is clearly evident with regard to consumption channel, money supply channel and import channel but not the interest rate channel.

Identifying Inflation Dynamics in India in the Post Reform Period

“…Recently, Nguyen (2015) also reported the evidence of fiscal INF in case of eight selected economies of Asia. More recently, Ramu and Gayithri (2017) through SVAR approach have identified some transmission channels by which fiscal deficit impacts inflation in India. Khundrakpam and Pattanaik (2010) by applying cointegration method assess the importance of both demand and supply side factors in inflation.…”

“…Recently, Nguyen (2015) also reported the evidence of fiscal INF in case of eight selected economies of Asia. More recently, Ramu and Gayithri (2017) through SVAR approach have identified some transmission channels by which fiscal deficit impacts inflation in India.…”

The asymmetry effect of budget deficit and inflation in Nigeria

“…Empirically, plethora of studies has been conducted on the nexus between budget deficit and inflation with diverse outcomes (Kundrapam and Pattanaik, 2010;Cata˜o and Terrones, 2005;Lin and Chu, 2013;Mohanty and John, 2014;Jalil et al, 2014;Abu and Karim, 2015;Ishaq and Mohsin, 2015;Agoba et al, 2017;Ramu and Gayithri, 2017;Klein and Linnemann, 2020;Tiwari et al, 2015;Ahmad and Aworinde, 2019;Ssebulime and Edward, 2019;Ali andKhalid, 2019, Khan et al, 2020). In Nigeria, few studies have investigated the link between budget deficit and inflation (Olusoji and Oderinde, 2011;Awe and Olalere, 2012;Oseni and Sanni, 2016;Danlami et al, 2019;Apinran et al, 2019;Olaniyi, 2020;and Fasanya, Fajobi and Adetokunbo;2021).…”