FISCAL DEFICIT & INFLATION: AN EMPIRICAL ANALYSIS

FOR

INDIA

Gaurav Tripathi
Jamia Millia Islamia

Are fiscal deficits inflationary ? ?

While the answer from conventional economic theory and from monetary authorities is a conclusive

yes,

the evidence from empirical literature is

an unsettled may be.

Are fiscal deficits inflationary ? ?

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.

Objective
This

study examines the linkage between fiscal deficit and inflation in India.
The main objective of this study is to examine the factors that are responsible for increasing these.

What does the paper finds ???

The

research finds that inflation is not at all cause of fiscal deficit.

The major factors are global recession, government expenditure, inefficient social programs and money supply are found to be important determinants of mounting fiscal deficit.

Literature Review of Secondary Sources

The relationship between budget deficit, money supply/growth and inflation is a very common debate in economic literature. Lots of economists have analysed the relationship among the three variables for years by using different countries, different econometric technique and different time period.
Most of the studies have analysed how

fiscal deficit and money supply effect inflation.

Literature Review of Secondary Sources

Fischer(1989) , by analysing the relationship between fiscal deficit and inflation different countries found that the countries with high inflation have strong relationship between inflation and budget deficit. He noted that high inflation has reducing effect on tax revenue which is known as Tanzi-Olivera effect. Tanzi(2000) scrutinize the relationship between tax revenue and budget deficit in Latin American countries. He found that in these countries the budget deficit and public deficit increase even after rise in the tax revenue. He results that this imbalance results from the deficient and inefficient social programs.

Literature Review of Secondary Sources

Sen (2003) has analysed the relationship between tax revenue and inflation. He found that high inflation cause to decrease in tax revenue in crisis time and low level of tax revenue cause to tax loss which leads to high budget deficit. He also cross-examines the role of time in the process of tax collection. He concluded that short-term tax collection is better than long-term tax collection. In the long run, the real value of tax revenue tends to decline because of persistent high inflation.

Data analysis

Money supply has been measured through the measure of M3(Broad money), inflation has been measured through consumer price index of all level, gross fiscal deficit has been taken as a measure of deficit and government expenditure has been measured by total expenditure of the central government. The period 1970-71 to 2011-12 has been taken for analysis in this study

Methodology
Gross fiscal Deficit = Inflation + Money Supply + Government Expenditure

Hypothetical Formulation
Inflation increases gross fiscal deficit Money Supply decreases fiscal deficit Government expenditure increases fiscal deficit

Analysis Fiscal Deficit

When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits. FD= Budget Expenditure-Budget Receipt

Analysis Fiscal Deficit

Analysis Inflation

A rise in general price level is called inflation. Every economy calculates its inflation for efficient financial administration as the multidimensional effects of inflation makes it necessary. India calculates inflation on two price indices: wholesale price index (WPI) at macro level and consumer price index (CPI) is used for micro level.

Analysis Inflation

Current Economic Situation

For the Indian Economy, the year 2011-12 was a year of disappointing growth performance. During each of the previous two years, 2009-10 and 2010-11, Indias gross domestic product GDP (at factor cost) grew by 8.4 % per annum. Further, in 2010-11 the GDP at market price grew by remarkable 9.6%.

Current Economic Situation

A key component of fiscal reforms and the fiscal responsibility and the budget management legislations is public expenditure management. In an emerging economy with a lot of unmet minimum needs of the masses that require focus on equity issues and macroeconomic needs that required prudential limits on deficits and debts, calibrating fiscal policies should entail an optimization of outcome from public expenditure. Expenditure reforms have to be a long term nature to overcome the structural rigidities.

Current Economic Situation

Conclusion

In current scenario the economy is not performing up to level which it had performed earlier. The government has to clear supply bottlenecks on variety of fronts-infrastructure, energy, mineral and labour which are responsible for the apparent decline in the trend of growth. There is need of overall structural and sustainable development in the Indian and the global economy.

Conclusion

For removing fiscal deficit and inflation and to put economy back on track, Govt. requires to take an

ACTION.

Conclusion

Action to boost our economy prospects by promoting investment, capital formation, increased agriculture output and productivity through government investment, fiscal consolidation, education and skill development to harness demographic dividend, ensure flow of foreign investment in asset creation and focus on inclusive growth through improved health facilities, education and financial inclusion.

Thanks!