Inflation in India: causes and anti-inflationary policy perception
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Inflation in India: causes and anti‑inflationary policy perception Biswajit Maitra1 · Tafajul Hossain1 Received: 12 February 2019 / Accepted: 19 February 2020 © Japan Economic Policy Association (JEPA) 2020
Abstract A comprehensive strategy for price stability, particularly for the long-run, requires coordination between monetary and fiscal policy. To our knowledge, the fiscal initiative to control inflation in India is abstracted. The targets and executions of the fiscal policy of different state governments are independent, lop-sided, and also distinct from the fiscal stance of the central government. Besides, the fiscal policy of the central and the state governments are not consistent with the monetary policy of the Reserve Bank of India. Under this backdrop, this paper examines the extent of fiscal variable, trade openness in addition to structural and monetary policy variables impacting inflation in India since the 1980′s. The paper confirms that public debt is inflationary; while openness is anti-inflationary particularly the consumer price inflation is concerned. Significant impact of the money growth, real interest rate, real effective exchange rate, and the output gap in consumer and wholesale price inflation is also established. The paper concludes that apart from the monetary management, anti-inflationary fiscal policy and comprehensive policy for the real sector and external sector are also essential to stabilize inflation for the long-run. Prolific monetary-fiscal policy coordination in India is a fantasy. Keywords Inflation · Money growth · Real interest rate · Real exchange rate · Output gap · Public debt JEL Classification E31 · E62 · E52
* Biswajit Maitra [email protected] Tafajul Hossain [email protected] 1
Department of Economics, University of Gour Banga, Malda, West Bengal 732103, India
13
Vol.:(0123456789)
International Journal of Economic Policy Studies
Introduction Economic theory holds that inflation is caused by monetary, fiscal, and structural variables. Besides, in the era of globalization, financial markets around the world are integrated and, therefore, innovations emanating from outer-world often transmitted into an economy and affect inflation indices. In a flexible exchange rate regime, the exchange rate acts as a signaling variable for external commotion and impact domestic policy for price stability. Managing inflation in such an economy is a challenging task. The Reserve Bank of India (RBI) since the independence of India involves some monetary initiatives to stabilize inflation. Since 2015 RBI has been keen to persuade inflation and has implemented the inflation-targeting monetary policy. For achieving price stability, particularly in the long-run, both the monetary and the fiscal policy have a significant role. Specifically, a comprehensive strategy for price stability requires coordination between monetary and fiscal policy. However, to our knowledge, the fiscal initiative to control inflation in India is abstracted. The fiscal policy in India is diverse
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