This study examines the relationship between fiscal deficit and inflation in India between 1970-71 and 2011-12. It finds that inflation is not caused by fiscal deficit, and that major factors driving deficit are the global recession, government expenditure, inefficient social programs, and money supply. The paper reviews literature on the relationship between budget deficits, money supply, growth, and inflation. It analyzes the data on fiscal deficit, inflation, money supply, and government expenditure. The conclusion is that government action is needed to boost investment, fiscal consolidation, education, and inclusive growth to address India's economic challenges.
gaurav tripathi year_jamia milia islamia, delhiiiiii
1. FISCAL DEFICIT & INFLATION:
AN EMPIRICAL ANALYSIS
FOR
INDIA
Gaurav Tripathi
Jamia Millia Islamia
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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
12. 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
14. Analysis – Inflation
A rise in general price level is called inflation.
Every economy calculates its inflation for
efficient financial administration as the multi-
dimensional 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.
16. 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, India‟s 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%.
17. 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.
19. 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.
20. Conclusion
For removing fiscal deficit and inflation and to put
economy back on track, Govt. requires to take an
“ ACTION”.
21. 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.
