IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Global Crisis, Fiscal Response and Medium-term Risks to Inflation in India

  • Khundrakpam, Jeevan Kumar
  • Pattanaik, Sitikantha

Contagion from the global crisis necessitated use of fiscal stimulus measures in India during 2008-10 in order to contain a major slowdown in economic growth. Given the usual downward inflexibility of fiscal deficit once it reaches a high level, as has been experienced by India in the past, there could be medium-term implications for the future inflation path, which must be recognised while designing the timing and speed of fiscal exit. Inflation, at times, may become effectively a fiscal phenomenon, since the fiscal stance could influence significantly the overall monetary conditions. As highlighted in this paper, fiscal deficit could be seen to influence the inflation process either through growth of base money created by the RBI (i.e. net RBI credit to the Government) or through higher aggregate demand associated with an expansionary fiscal stance (which could increase growth in broad money). Empirical estimates of this paper conducted over the sample period 1953-2009 suggest that one percentage point increase in the level of the fiscal deficit could cause about a quarter of a percentage point increase in the Wholesale Price Index (WPI). The paper emphasises that the potential inflation risk should work as an important motivating factor to ensure a faster return to the fiscal consolidation path in India, driven by quality of adjustment with appropriate rationalisation of expenditure, rather than waiting for revenue buoyancy associated with sustained robust growth to do the job automatically. The importance of fiscal space in the India specific context needs to be seen in terms of not only the usual output stabilisation role of fiscal policy but also the occasional need for use of fiscal measures to contain such inflationary pressures that may arise from temporary but large supply shocks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/50907/1/MPRA_paper_50907.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50907.

as
in new window

Length:
Date of creation: Jan 2010
Date of revision:
Publication status: Published in Reserve Bank of India Occasional Papers No.2, Monsoon.31(2010): pp. 1-30
Handle: RePEc:pra:mprapa:50907
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Troy Davig & Eric Leeper, 2009. "Monetary-Fiscal Policy Interactions And Fiscal Stimulus," Caepr Working Papers 2009-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  2. Khundrakpam, Jeevan K. & Goyal, Rajan, 2009. "Is the Government Deficit in India Still Relevant for Stabilisation?," MPRA Paper 50905, University Library of Munich, Germany.
  3. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
  4. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:50907. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.