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.

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.

Are fiscal deficits inflationary ? ? ?

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 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.

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, 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%.

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!