Bha , Ja ed Ahmad; Sha ma, Na esh Kuma
A icle
Iden i ying iscal in la ion in India: Some ecen e idence
om an asymme ic app oach
Jou nal o Economics, Finance and Adminis a i e Science
P o ided in Coope a ion wi h:
Uni e sidad ESAN, Lima
Sugges ed Ci a ion: Bha , Ja ed Ahmad; Sha ma, Na esh Kuma (2020) : Iden i ying iscal in la ion
in India: Some ecen e idence om an asymme ic app oach, Jou nal o Economics, Finance and
Adminis a i e Science, ISSN 2218-0648, Eme ald Publishing Limi ed, Bingley, Vol. 25, Iss. 50, pp.
363-393,
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Iden i ying fiscal infla ion in
India: some ecen e idence om
an asymme ic app oach
Ja ed Ahmad Bha and Na esh Kuma Sha ma
School o Economics, Uni e si y o Hyde abad, Hyde abad, India
Abs ac
Pu pose –Among he many ac o s ueling he infla iona y endencies in an economy such as mone a y
shocks, s uc u al shocks, demand shocks, ex e nal shocks and demog aphic changes, he issue o infla ion
(INF) has also been ound o be ela ed o fiscal policy decisions o he go e nmen . The pu pose o his s udy
is o in es iga e he infla iona y endencies in India pa icula ly om he fiscal poin o iew. The s udy also
examines he influence o o he po en ial de e minan s such as ou pu g ow h a e, in e es a e, ade-
openness (TO) and oil p ice infla ion (OPI).
Design/me hodology/app oach –To examine he dynamic na u e o associa ion be ween fiscal defici
and infla ion, he s udy applies he Toda-Yamamo o (1995) es and B ei ung and Candelon (2006) es o
in es iga e he na u e o causali y in ime and equency domain amewo ks. In addi ion, o sc u inize he
possibili y o a long- un associa ion, ha oo om an asymme ic poin o iew, he s udy applies a Non-linea
Au o eg essi e Dis ibu ed lag model (NARDL) gi en by Shin e al. (2014). Finally, non-linea cumula i e
dynamic mul iplie s a e used o ace he a e se be ween disequilib ium posi ion o sho - un and
subsequen long- un equilib ium o he sys em.
Findings –The au ho s ound a unidi ec ional causali y om fiscal defici o infla ion in case o ime
domain analysis and no eedback causali y is epo ed. Howe e , in case o equency domain design,
causali y om fiscal defici o infla ion is ound a low equencies only, i.e. no sho - un causali y is
es ablished and hence dynamic na u e o he ela ionship be ween he wo a iables is indica ed. Using
NARDL model, he esul s documen he exis ence o an asymme ic long- un di ec associa ion be ween
fiscal defici and infla ion. Howe e , an inc ease in defici is ound o be mo e infla iona y and a dec ease
a ec s he infla ion wi h a lowe magni ude. The asymme ic impac o fiscal defici on infla ion can be
explained h ough he exis ence o liquidi y cons ain s, consump ion-in es men downwa d inflexibili y and
he downwa d p ice s ickiness. Con ac iona y mone a y policy ac ion is ound o be mo e e ec i e han an
expansiona y one, signi ying he asymme ic influence o mone a y policy ac ions on he infla ion o India.
© Ja ed Ahmad Bha and Na esh Kuma Sha ma. Published in Jou nal o Economics, Finance and
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We hank G eenwood Nimmo o p o iding es ima ion code o NARDL model and he edi o ial s aff
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Au ho con ibu ions: The au ho s con ibu ed in he ollowing ways o he pape : Bha , Ja ed
Ahmad, Co esponding Au ho , Concep ualiza ion (Equal), Da a cu a ion (Equal), Fo mal analysis
(Equal), In es iga ion (Equal), Me hodology (Equal), W i ing-o iginal d a (Lead), W i ing- e iew
and edi ing (Equal), Sha ma, Na esh Kuma , Concep ualiza ion (Equal), Da a cu a ion (Equal),
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(Equal), W i ing- e iew and edi ing (Equal).
Iden i ying
fiscal infla ion
in India
363
Recei ed 8 Ma ch 2019
Re ised 14 May 2019
Accep ed 14 May 2019
Jou nal o Economics, Finance and
Adminis a i e Science
Vol. 25 No. 50, 2020
pp. 363-393
Eme ald Publishing Limi ed
2218-0648
DOI 10.1108/JEFAS-03-2019-0032
The cu en issue and ull ex a chi e o his jou nal is a ailable on Eme ald Insigh a :
h ps://www.eme ald.com/insigh /2218-0648.h m
Simila ly, in a supply-cons ained economy wi h downwa d p ice igidi y, he au ho s ound an asymme ic
impac o ou pu g ow h and ou pu decline on infla ion. As ega d o he ade-openness, al hough an asymme y
is epo ed, he signs e u e he alida ion o Rome (1993) hypo hesis. Finally, he impac o oil p ice infla ion on
he infla iona y p essu es is acco ding o heo y bu he coe ficien s a e de oid o s a is ical significance.
P ac ical implica ions –These esul s indica e some impo an policy ecommenda ions. Fiscal
consolida ion s a egy should be execu ed in an app eciable manne o achie e he sound fiscal heal h and
lowe INF. The disciplined fiscal s a egy would also be impe a i e o an e ec i e mone a y policy. Mone a y
au ho i ies should possess no iceable c edibili y o manage he mac oeconomic sys em and policy s ances should
be implemen ed acco ding o equi emen s o he economy. G ow h in ou pu should be encou aged o ha e wo-
old benefi s o he economy – educing INF on he one hand and fiscal defici s on he o he .
O iginali y/ alue –The s udy con ibu es o he exis ing li e a u e in he ollowing ways. Fi s , aking
no e o dynamic na u e o he ela ionship be ween hese wo a iables, he s udy examined he defici INF
nexus in a dynamic and asymme ic amewo k. The no el y o he s udy is ensu ed by he e y na u e o i is
he fi s s udy in case o India o iden i y he fiscal INF in an asymme ic configu a ion. The au ho s applied a
NARDL model, gi en by Shin e al. (2014) o examine he exis ence o any coin eg a ing ela ionship in an
asymme ic pa adigm. Second, he na u e o causali y be ween fiscal defici and INF has been examined in a
ime domain and FD amewo k o po ay p ecisely he casual in e ac ions be ween hese wo a iables in
he sho - un and long un. The s udy will, he e o e, en ich he exis ing li e a u e along he asymme ic lines.
Keywo ds India, Infla ion, Asymme y, Casuali y, Fiscal defici , Ou pu g ow h
Pape ype Resea ch pape
1. In oduc ion
Highe infla ion (INF) has been conside ed a g ow h e a ding ac o and a means o educing
he wel a e s anda d o common masses. The e o e, main aining a s able p ice le el ea u ed by
low INF a e has emained a p io i y objec i e o mac oeconomic managemen o a ious
economies including India. Among he many ac o s ueling he infla iona y endencies in an
economy such as mone a y shocks, s uc u al shocks, demand shocks, ex e nal shocks and
demog aphic changes, he issue o INF has also been ound ela ed o fiscal policy decisions o
he go e nmen . The fiscal heo y o p ice le el (FTPL) (Leepe , 1991;Sims, 1994 and Wood o d,
2001)and heseminalwo ko Sa gen and Wallace (1981) de eloped he heo e ical con ou s o
he es ablishmen o an in e ac ion be ween infla iona y p essu es in an economy and he
go e nmen budge a y imbalances. The o me alks abou he complemen a i y be ween
mone a y and fiscal policies o he p ice le el de e mina ion; and on policy plane, he heo y
sugges s he sus ainabili y o go e nmen finances o ensu e he s able p ice le el. The la e
highligh s he ole o ela i e dominance o mone a y/fiscal au ho i ies in he de e mina ion o
he p ice le el. In a mone a y dominance egime, fiscal au ho i ies abide wi h he decisions o
independen ly de e mined mone a y policy and a e cons ained o ollow a fiscal discipline
s a egy o a oid he infla iona y p essu es in he economy. On he con a y, in a fiscal
dominance egime, he fiscal au ho i ies de e mine he le el o cu en and u u e fiscal
imbalances and he eby cons ain he mone a y au ho i y o he demand o go e nmen bonds.
This leads o excess money c ea ion h ough deb mone iza ion, and hence, infla iona y
endencies eme ge [1]. The defici could be financed ei he h ough he imposi ion o highe
axes o domes ic o ex e nal bo owings. Howe e , de eloping coun ies qui e o en finance
hei defici h ough deb mone iza ion because o he high cos s associa ed wi h highe ax
a es, poli ical ins abili y and ma ke bo owings. As a esul , fiscal iew o INF is mo e o en
epo ed in he de eloping coun ies han in he de eloped coun ies, which a e seen o ha e
e ficien ax collec ion sys em and conside able access o ex e nal bo owings (Ca ao and
Te ones, 2005).
The p esen pape aims a examining he impac o fiscal defici on he infla ion in case o
Indian economy. Though se e al s udies ha e been conduc ed in he Indian con ex , he
JEFAS
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defici -INF nexus has no been e alua ed exhaus i ely and he e idence epo ed by ea lie
s udies emained inconclusi e. India is chosen as a candida e o analysis because o i s ib an
INF dynamics and i s obse ed downwa d inflexibili y o defici financing (Figu es 1 and 2).
The defici financing has always been conside ed a iable ins umen o a oid any
ecessiona y endencies in he economy. Recognizing he ad e se impac s o excess defici , he
go e nmen ollowed he fiscal consolida ion p og am h ough he FRBM Ac [2] (2003-04) and
finalized he p o-g ow h a ge s o fiscal imbalances. Howe e , he ecen fiscal esponse o he
2008 global c isis, ollowing he suspension o fiscal a ge s, no only enabled India o a oid he
c isis a home bu also o con inue along i s g ow h ajec o y as well. The mo e, howe e ,
ep esen ed a de ia ion om he fiscal discipline pa h. E en hough he e o s ha e been made
o cu ail he defici figu es app eciably, he economy is s ill plagued wi h pe sis en defici o
Figu e 1.
INF a e and fiscal
defici as a
pe cen age o GDP
–
10
–5
0
5
10
15
20
25
30
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
GFD INF
Sou ce: Own elabo a ion
Figu e 2.
INF a e and fiscal
defici as a
pe cen age o na ow
money
–60
–50
–40
–30
–20
–10
0
10
20
30
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
INF GFDD
Sou ce: Own elabo a ion
Iden i ying
fiscal infla ion
in India
365
3.52% o g oss domes ic p oduc (GDP) in 2016-17[3]. In ligh o swelling defici figu es and
ib an infla iona y phenomenon, as obse ed om he Figu es 1 and 2in he economy, i
would, he e o e, be impo an o examine he possible in e ac ion be ween hese wo a iables.
Though he infla iona y p essu es in India ha e been heo e ically asc ibed o bo h
domes ic and o eign ac o s and o bo h supply and demand shocks, howe e , he empi ical
e idence epo ed emains inadequa e (Mohan y and John, 2015). The possible eason o
such an inadequacy could be he changes in de e minan s o INF o e he pe iod o ime
(Mohan y and John, 2015). Gi en he backd op, we a emp ed o analyze he infla iona y
phenomenon om he iewpoin o fiscal defici o so ou he likely ole o he la e in
explaining he o e all INF. Wo k epo ed is mo i a ed by lack o adequa e li e a u e so a
as India is conce ned and mixed e idence epo ed in he gene al li e a u e on he defici -INF
nexus. The s udy adop s a b oade analy ical amewo k o include all he po en ial
de e minan s o INF in addi ion o fiscal defici . Da a o he pe iod 1970-2016 has been
examined o p o ide an e alua ion o Indian infla iona y p oblem wi h some ecen e idence.
The pape hopes o con ibu e o he exis ing li e a u e in he ollowing ways. Fi s , aking no e o
dynamic na u e o he ela ionship be ween hese wo a iables, we examined he defici INF
nexus in a dynamic and asymme ic amewo k. The no el y o he s udy is ensu ed by he e y
na u e o i is he fi s s udy in case o India o iden i y he fiscal INF in an asymme ic
configu a ion. We applied a non-linea au o eg essi e dis ibu ed lag model (NARDL), gi en by
Shin e al. (2014) o examine he exis ence, i any, o coin eg a ing ela ionship in an asymme ic
pa adigm. This me hod has been applied because o i s po en ial me i s o e he o he
con en ional linea app oaches. Second, he na u e o causali y be ween fiscal defici and INF is
examined in ime domain and FD amewo ks o po ay p ecisely he casual in e ac ions
be ween hese wo a iables in bo h he sho - un and long un.
The s udies so a conduc ed, ha e p ima ily based hei analysis wi hin a linea o
symme ical amewo k and ha e igno ed he possibili y o any asymme ic na u e o he
associa ion be ween he wo a iables. The se e e epe cussions o his p ac ice o assuming a
symme ic associa ion may lead o inco ec policy ac ions as may be needed o o e all
mac oeconomic s abili y. The choice o an eme ging economy, India, o he asymme ic
in es iga ion o defici -INF nexus is mo i a ed by he p e alence o a la ge sec ion o liquidi y
cons ained popula ion oge he wi h pe sis en inequali ies (Mazumda e al., 2017;Bha and
Sha ma, 2018). The lack o pu chasing powe , liquidi y igh ening and a dis o ed c edi alloca ion
sys em as p e alen in India oge he wi h he ope a ion o consump ion/in es men downwa d
inflexibili y makes i likely ha he esponse o INF o fiscal defici may no be symme ic.
The emaining pa o he pape is a anged as ollows. Sec ion 2 specifies he heo e ical
deba e. A cu so y summa y o he ele an li e a u e is epo ed in Sec ion 3. Sec ion 4
na a es he na u e o a iables and exposi ion o he econome ic me hod o be used,
ollowed by esul discussion in Sec ion 5. Finally, he pape conclusion and associa ed
policy ecommenda ions a e highligh ed in Sec ion 6.
2. Theo e ical deba e
Theo e ically, a ious iews ha e been ad oca ed abou he impac o fiscal defici on INF.
Neoclassical heo y asse ed a posi i e ela ionship be ween he wo h ough highe money
demand. When he income o he economic agen s ise, mo e money is needed o acili a e
he ansac ions due o inc eased incomes. Demand o eal balances inc ease because o he
ise in le el o eal income and hence leads o hike in he p ice le el (Ball, 2017). The
Keynesians also p o ide ano he channel o a di ec associa ion be ween fiscal defici and
INF like hose o Elmendo and Mankiw (1999)[4] h ough agg ega e demand
augmen a ion. The collapse o B e on woods sys em in 1971, which esul ed in he e a o
JEFAS
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366

flexible exchange a e (EXR) egime and he oil p ice shock o 1970s led o he b eakdown o
celeb a ed Philips cu e hypo hesis. This lead o he de elopmen o Mone a is school and
he pionee o which, Mil on F iedman, main ained ha INF is always and e e ywhe e a
mone a y phenomenon and ha money supply g ow h ha may esul because o defici
financing causes INF.
The impac o fiscal defici s on INF has also been discussed in he celeb a ed wo k o
Sa gen and Wallace (1981) in a amewo k o “mone a y dominance”and “fiscal
dominance” egimes. The defici is financed ei he h ough bond sales o he public o
h ough he seignio age c ea ed by mone a y au ho i y o by a combina ion o bo h. In he
case o an independen mone a y au ho i y amewo k, fiscal au ho i y is cons ained in he
o mula ion o i s policy. In his egime o mone a y dominance, money supply is egula ed
and fiscal defici s would end o be non-infla iona y. On he con a y in a fiscal dominance
egime, he egula ion o money supply by he mone a y au ho i ies becomes less e ec i e
and fiscal au ho i ies sa is y he in e - empo al budge cons ain s h ough he excess
money c ea ion, in he p ocess leading o INF. While he mone a is s asc ibe he ag o he
mone a y phenomenon o INF, Fische and Eas e ly (1990) ega ded he infla iona y
endencies as being a fiscal phenomenon. In eali y, fiscal au ho i ies ha e o en p e e ed
seignio age o finance he fiscal imbalances, he eby igge ing he infla iona y p essu es.
The e is ye ano he ecen heo e ical p emise a guing o he na u e o he ela ionship
be ween fiscal defici and INF, namely, he FTPL, gi en by Wood o d (1994,1995,2001),
McCallum (2001),Coch ane (2001,2005)andLeepe and Yun (2006). Acco ding o FTPL, he
p ice le el in an economy is no de e mined indi idually by mone a y au ho i ies alone, bu
complemen a i y o bo h mone a y and fiscal policies is ope a i e. When he fiscal au ho i ies
make an adjus men o he p esen alue o i s u u e su pluses, he p ice le el will ise o lowe
he eal alue o deb [5]. In FTPL, fiscal au ho i ies a e pe mi ed o choose he su plus o defici
figu es, no necessa ily conduci e o fiscal sol ency. Thus because o he exogenous cha ac e
o fiscal ac ions, endogenous mo emen o he p ice le el is equi ed o achie e fiscal sol ency.
The fiscal policy, hus, becomes a leade and mone a y policy a ollowe , con ols only he
iming o INF and wi h he esul , fiscal defici end o be infla iona y. Min o d and Peel (2002),
he e o e, asse ed ha p ice le el and fiscal policy a e linked h ough he p esen alue o he
co esponding budge cons ain [6]. INF may no be a esul o money c ea ion only, bu in a
dominan fiscal policy egime, whe e he fiscal policy is no sus ainable and go e nmen bonds
a e conside ed ne weal h, he weal h e ec s could comp omise he objec i e o p ice s abili y
i espec i e o cen al bank’s commi men o con ol INF (Ramu and Gayi h i, 2017).
I is impo an o no e ha he associa ion be ween defici s and INF is a dynamic one Sa gen
and Wallace (1981),Ca ao and Te ones (2005) and Lin and Chu (2013).Inafiscal dominance
egime, fiscal defici p o ide an es ima e o u u e and no he cu en money c ea ion
(seignio age) equi ed o hei financing, and hence, do no lead o cu en INF. This is because
o he ac ha bo owing enables fiscal au ho i ies o alloca e he seignio age in e - empo ally,
and hus, e u e he exis ence o any con empo aneous associa ion. In addi ion, he sho - un
associa ion be ween he wo a iables can be mul iplex (Do nbusch e al.,1990), can in ol e a
possible eedback o INF on fiscal defici s (Ca ao and Te ones, 2005) and hence i s di ec ion and
s eng h may no be accommoda i e o heo e ical analogies. The e o e, he empi ical
examina ion be ween hese wo a iables would be analyzed om a long- e m pe spec i e.
3. Empi ical e iew
3.1 Gene al li e a u e
The issue o INF has always been a he co e o heo e ical and empi ical deba es. Schola s
ha e analyzed he infla iona y endencies in a ious coun ies wi h di e en da a se s,
Iden i ying
fiscal infla ion
in India
367
di e en de e minan s and di e en econome ic me hodologies. So a , as he impac o
fiscal defici on he INF is conce ned, Hambu ge and Zwick (1981) ound he infla iona y
na u e o budge defici while analyzing he USA da a o a pe iod 1954-1976. The au ho s also
ound budge defici mo e infla iona y in he Keynesian egime (1961-1974). Howe e , Dwye
(1982) ailed o documen any e idence in a o o influence o deb on he money supply and
o e all p ice le el in he economy. On he con a y, Ahking and Mille (1985) epo ed he
e idence o defici -INF ela ionship only in some specific pe iods. Simila ly, Da a (1985) ound
money g ow h and fiscal defici as he significan de e minan s o inc eased p ice le els.
Applying a neo-classical amewo k, King and Plosse (1985) epo ed he exis ence o weak
defici -INF ela ionship. Mo eo e , King and Plosse (1985) ailed o unco e any such
ela ionship while examining a mix o 12 de eloped and de eloping coun ies.
Examining he da a om 10 de eloped coun ies, Gianna os and Kollu i (1985) ound he
absence o any kind o ela ionship be ween INF, money supply and fiscal defici . Simila ly,
using he da a o e he pe iod 1952-1987, P o opapadakis and Siegel (1987) also epo ed he
exis ence o a eeble associa ion be ween hese wo a iables in ano he se o 10 de eloped
economies. In addi ion, INF is no ound o espond deb g ow h s ongly. In ano he s udy
on se en indus ial economies, Ba nha and Da a (1988) ound he absence o any
unidi ec ional o eedback G ange causali y be ween hese INF and fiscal defici .
In case o 17 de eloping coun ies and o a ime pe iod om 1961 o 1985, De Haan and
Zelho s (1990) ound he absence o any e idence in a o o “fiscal dominance hypo hesis”
and epo ed ha INF eac s o defici onlydu inghighINFepisodes.Me in (1998)
documen ed he infla iona y impac o fiscal defici in case o Tu key. Howe e , analyzing he
da a on h ee ansi ion economies, Komulainen and Pi ilä (2002) epo ed he neu ali y o
fiscal defici in explaining he infla iona y endencies in hese economies. Simila ly, Loungani
and Swagel (2001) ound puny associa ion be ween fiscal balance and INF in case o 53
de eloping coun ies. Howe e , he ela ionship becomes s onge in case o economies wi h
highe a e age INF. The au ho s u he epo ed he non-linea influence o fiscal imbalances
on INF and ound ha he o me a ec s he la e significan ly only when he magni ude o
o me is abo e 5%. Domaç and Yücel (2005) while applying pooled p obi es ima ion in case o
15 eme ging economies documen ed he infla iona y ole o fiscal defici . Recen ly, Nguyen
(2015) also epo ed he e idence o fiscal INF in case o eigh selec ed economies o Asia.
Some schola s we e in e es ed o examine he defici -INF nexus in case o a mix o
de eloped and de eloping coun ies oge he in a panel se ing and epo ed di e si y o
esul s. Fo ins ance, Ka as (1994) ound absence o any impac o defici on INF in case o a
panel o 32 de eloped and de eloping coun ies. Simila ly, examining a panel o 90
coun ies, Click (1998) epo ed he absence o any impac o domes ic deb on INF o e he
pe iod 1971-1990. Howe e , Co a elli e al. (1998) ound he infla iona y na u e o defici
along wi h INF pe sis ence in case o a mixed panel o 47 coun ies. Simila ly, Laasch e al.
(2002) ound he e idence in a o o fiscal INF by examining a mixed panel o 94 economies.
The s udy u he epo ed he significan ole o fiscal defici in de e mining he seignio age
and INF in case o high INF pe iods and in case o coun ies wi h high a e age INF. Ca ao
and Te ones (2005) examined a da a se comp ising o 109 coun ies o e a pe iod o 1960-
2001 o in es iga e he dynamic na u e o in e ac ions be ween hese wo a iables. The
s udy documen ed he e idence o infla iona y na u e o defici figu es in case o ansi ion
economies and in he economies ea u ed wi h high episodes o INF bu no in case o
ad anced economies and hose expe iencing lowe INF le els. Simila ly, examining he
la ge da a se o e he pe iod 1962-2004 o a mixed panel o 71 coun ies, Kwon e al. (2009)
ound he posi i e and app eciable impac o deb g ow h on he INF in case o coun ies
plagued wi h massi e deb s bu , howe e , he impac is low in emaining c oss-sec ions o
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panel. Likewise, Lin and Chu (2013) while analyzing he da a on 91 coun ies o a pe iod
1960-2006, ound he esul s mo e o less simila o ha o Ca ao and Te ones (2005).Mo e
ecen ly, T an (2018) in es iga ed he asymme ic impac o fiscal balance on he key
mone a y a iables such as in e es a e, INF and EXR in case o ou eme ging economies
such as BRIC o he pe iod 1999-2000. The s udy ound he long- un associa ion be ween
fiscal balance and mone a y a iables in case o coun ies such as B azil and India, whe eas
no such associa ion is ound o China and Russia. In addi ion, he de e io a ion o fiscal
balance is ound o ha e a mo e powe ul and significan impac on he mone a y a iables
han when i imp o es.
3.2 S udies specific o India
The defici INF in e ac ion has also been examined in he case o Indian economy. Sa ma
(1982) and Ranga ajan and Mohan y (1998) ha e ound he exis ence o a pe ennial
in e ac ion be ween fiscal defici and INF in bo h o wa d and eedback di ec ions. In
addi ion, hese s udies ha e epo ed he fiscal defici among he impo an de e minan s o
INF in India. The ou come o hese s udies is ele an o he p e ailing condi ions o ha
ime. Wi h he pe manen blockade o ad hoc easu y bills in 1996-1997, ma ke bo owings
used o finance defici ceased as an op ion and mode o mone iza ion was eso ed. Howe e ,
e en a e accoun ing o mone iza ion pe iod o defici financing in an ex ended da a se
analysis, Ash a e al. (2004) epo ed he absence o long- un associa ion be ween Rese e
Bank c edi and fiscal defici and be ween money and Rese e Bank c edi o he
go e nmen . The s udy, he e o e, ecommended he sc apping o fiscal defici as a
s abiliza ion ool. Using a mo e ecen da a se and an upda ed me hodology, Khund akpam
and Goyal (2009) epo ed he significan con ibu ion o fiscal defici in he inc emen al
ese e money c ea ion and o e all money expansion, which finally leads o INF in he
economy. Simila ly, Khund akpam and Pa anaik (2010) ound he infla iona y ole o fiscal
imbalances. RBI (2012), also epo ed e idence in a o o he fiscal INF in India. Mohan y
and John (2015) applied he ime- a ying s uc u al VAR p ocedu e o analyze he ime-
a ying impac o a ious de e minan s o INF in India. This s udy epo ed he infla iona y
impac o fiscal defici . Mo e ecen ly, Ramu and Gayi h i (2017) ound he infla iona y
impac o fiscal defici in India. Th ough a SVAR app oach he au ho s ha e documen ed
he e idence o h ee ansmission channels such as consump ion expendi u e channel,
money supply channel and impo channel o po ay he a e se o he impac o fiscal
defici on INF. Howe e , no e idence in a o o in e es a e channel is obse ed.
The abo e li e a u e su ey highligh ed ce ain impo an poin s. On a e age defici s a e
epo ed o be less infla iona y in ad anced and low INF coun ies cha ac e ized by sound and
c edible mone a y au ho i ies and less fiscal dominance. Howe e , in de eloping coun ies wi h
highe INF a es and high INF episodes, he defici s a e ound o be infla iona y. The e is an
inconclusi eness documen ed abou he impac o he defici on INF in gene al and India in
pa icula A limi a ion o he exis ing li e a u e is ha he analy ical amewo k adop ed o he
empi ical exe cise is la gely symme ic/linea and he possibili y o any asymme ic na u e o
he ela ionship is omi ed[7]. To fill his oid, he p esen s udy, he e o e, is an a emp o
analyze he infla iona y impac o fiscal defici in a dynamic and asymme ic amewo k. Ou
s udy will, he e o e, en ich he exis ing li e a u e along he asymme ic lines.
4. Da a desc ip ion and empi ical me hodology
4.1 Da a desc ip ion
The selec ion o he a iables o he empi ical analysis is guided by he p e alen
heo e ical p oposi ions and he exis ing empi ical e idence. The da a se is o annual
Iden i ying
fiscal infla ion
in India
369
equency co e ing he pe iod 1970 o 2016. The a iables include INF, g oss fiscal defici
(GFD), na ow money (NM), GDP, eal GDP g ow h a e (GDPFC), in e es a e (CMR),
T ade-openness (TO), EXR and OPI.
The da a on all he a iables (excep OPI) has been aken om Da abase on Indian
Economy (DBIE), Rese e Bank o India websi e, whe eas o OPI we eso ed o
In e na ional Financial S a is ics (IFS) om In e na ional Mone a y Fund. INF is exp essed
as pe cen age annual a ia ion in he Wholesale P ice Index[8] (WPI). GFD is exp essed as a
pe cen age o GDP and ollowing Ca ao and Te ones (2005) and Lin and Chu (2013), G oss
Fiscal defici as a pe cen age o Na ow money (GFDD) is also scaled by NM o obus ness
pu poses. GDPFC is he annual change in GDP a cons an p ices. NM is ep esen ed by he
na ow money measu e. TO is p oxied by he sum o expo s and impo s bo h exp essed as
a pe cen age o GDP[9]. A e age o h ee Oil p ice measu es [10] in he o eign cu ency is
fi s con e ed in o upee e ms by mul iplying he nominal (EXR= `/$) o India wi h he
espec i e oil p ice figu es. Finally, OPI is calcula ed as he pe cen age annual a ia ion in
oil p ices exp essed in domes ic cu ency. The inclusion o OPI in he analysis will po ay
he e ec o oil p ice dynamism and EXR mo emen s simul aneously. The defini ion o
a ious a iables is gi en below in Table 1 and he desc ip i e s a is ics a e epo ed in
Table 2.
4.2 Empi ical me hodology
4.2.1 Causali y examina ion
4.2.1.1 Time-domain causali y. To examine he ime domain causali y be ween fiscal
defici and INF, he s udy uses he well-known Toda and Yamamo o (1995) es , hence o h
(TY) es . In he usual p ocedu e o con en ional G ange causali y es , he lagged
coe ficien s ob ained h ough unde lying VAR model a e se equal o ze o acco ding o
Wald’s p inciple. Howe e , Lü kepohl and K ä zig (2004) cau ions abou nons anda d
limi ing dis ibu ions o Wald’s es s a is ic because o he co-in eg a ion p ope ies o VAR
model. These nons anda d asymp o ic p ope ies ollow om he singula i y o asymp o ic
dis ibu ions. To do away wi h he singula i y nuisance, he TY es , supplemen ed he
o iginal VAR model wi h he maximum o de o in eg a ion o a iables. Mo eo e , he es
pe o ms be e in case he a iables a e in eg a ed and possibly coin eg a ed and he da a is
used in le els a he han in fi s di e ences [11].
The TY es is pe o med using he specifica ions 1 and 2. I is o be no ed ha he
s anda d G ange causali y is based on VAR(k) model, whe ein k is he app op ia e leng h
o lags o a ious a iables epo ed by di e en lag selec ion c i e ia. Howe e , in TY
p ocedu e, VAR (k þd
max
) model is es ima ed. He e d
max
deno e he maximum o de o
in eg a ion o he a iables suspec ed in he p ocess. I we se lag leng h k equal o pand d is
epo ed as he highes o de o in eg a ion, we p oceed as:
M ¼
u
0þ
u
iXp
i¼1M iþ
u
dM dþ#jXp
j¼1N jþ#dN dþ
«
(1)
N ¼
u
0
0þ
u
0
iXp
i¼1M iþ
u
0
dM dþ#0
jXp
j¼1N jþ#0
dN dþ
e
(2)
M and N cons i u e he se o a iables o be examined o analysis. He e ze o es ic ions a e
pu o fi s ppa ame e s o es he null o no causali y agains an al e na i e one whe e he
causali y is supposed o exis . The es s a is ic is usually e e ed as modified Wald and
ollows a
x
2
dis ibu ion wi h a deg ee o eedom equal o pand supposed o be
independen o he uni oo s and coin eg a ion.
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esul defici ises and is known as INF-induced fiscal defici (Helle , 1980). Simila ly,
excessi e infla iona y p essu es manda e a con ac iona y policy s ance on pa o mone a y
au ho i ies o con ol i . Highe nominal in e es a es (Fishe e ec ) inc ease he deb
in e es paymen s o he al eady accumula ed deb o he go e nmen and he eby igge
Table 3.
Uni oo es s
Va iables Tes Le els Fi s di e ence Le el Fi s di e ence
INF ADF 4.580* –5.586* –
PP 4.515* –5.017* –
KPSS 0.389 (5) –0.087 (5%) –
CMR ADF 3.381** –3.577** –
PP 3.280** –3.502*** –
KPSS 0.267 (5) –0.161 (1) –
GDPFC ADF 5.956* –8.164* –
PP 6.096* –8.209* –
KPSS 0.604 (1) –0.064 (5) –
GFD ADF 2.565 6.718* 2.465 6.895*
PP 2.435 7.709* 2.428 7.907*
KPSS 0.804** 0.215 (5) 0.173** 0.071 (5)
GFDD ADF 1.874 7.455* 2.152 7.554*
PP 1.829 7.536* 2.021 7.677*
KPSS 0.934* 0.229 (5) 0.167** 0.058 (5)
TO ADF 1.046 5.443* 1.479 5.414*
PP 1.123 5.484* 1.924 5.459*
KPSS 0.785* 0.104 (5) 0.178** 0.105 (5)
OPI ADF 6.344* –6.452* –
PP 6.327* –6.450* –
KPSS 0.153 (5) –0.085 (5) –
No es: *; ** and *** deno es he ejec ion o null hypo hesis agains an al e na i e a 1%, 5% and 10%
le el o significance. C and C þT e e o wo al e na i e specifica ions deno ing cons an only and cons an
and a linea end, espec i ely. ADF is Augmen ed Dickey–Fulle es (Dickey and Fulle , 1979), PP
ep esen s he Philips–Pe on es (Philips and Pe on, 1988) and KPSS deno es he Kwia kowski e al.
(1992) s a iona i y es . Schwa z in o ma ion c i e ia is applied o choose he app op ia e lag leng h o ADF
es and Newey –Wes au oma ic selec ion p ocedu e is used o choose he bandwid hs o PP and KPSS
es s
Table 4.
Coin eg a ion and
ime domain
causali y
Coin eg a ion es
Va iables Lag s uc u e (AIC, SBC) Bounds alue
INF and GFD 1, 0 10.675*
INF and GFDD 1, 0 10.473*
Time-domain causali y
Va iables X
S2
p- alue
GFD causes INF 19.443 0.035*
INF causes GFD 2.5017 0.990
GFDD causes INF 22.014 0.037*
INF causes GFDD 6.1367 0.909
No es: *Indica es s a is ical significance a 1% significance le el and he co esponding lowe and uppe
bound c i ical alues a e 6.84 and 7.84 o ARDL Bounds es , espec i ely. Fo he ime domain causali y,
Toda and Yamamo o (1995) es is applied. Fo he app op ia e lag selec ion, AIC and SBC c i e ia’s a e
used
Iden i ying
fiscal infla ion
in India
377

u he he defici le el. Simila ly, acco ding o Oli e a-Tanzi e ec , highe INF p essu es
can also lead o decline in he olume o ax collec ion and a de e io a ion o eal ax
p oceeds being collec ed by he go e nmen because o ime elapsed be ween he axable
e en occu s and he collec ion o he ax becomes e ec i e (collec ion lags) (Oli e a, 1967;
Tanzi, 1977)[25]. Thus because o de e io a ed e enue posi ion, defici inc eases. Besides
he posi i e associa ion, he INF and budge defici also mo e in e e se di ec ion unde
ce ain ci cums ances. INF ax would be a ype o ax e enue ha leads o a all in defici .
Simila ly, i he bo owing is no indexed o he INF, any hike in he la e will lowe he eal
alue o o me h ough bo owing shocks.
The lowe panel o Table 4 clea ly p o ides an indica ion ha fiscal defici g ange
causes INF in India bu eedback causali y is absen . The p esence o unidi ec ional
causali y and long- un coin eg a ion ela ionship highligh s he infla iona y influence o
defici in India. The es ablishmen o he unidi ec ional causali y om fiscal defici o INF is
in acco dance wi h he esul s o Ramu and Gayi h i (2017).
The ou pa s o Figu es 3(a)-3(d) po ay he causali y analysis in a FD amewo k
using BC es . Pa “a”o he figu e shows ha fiscal defici causes INF only a lowe
equencies o highe ime pe iods. A he highe equencies (sho - un), he defici is no
ound o cause he INF in India. Pa “b”again p o ides an illus a ion o he absence o
Figu e 3.
FD causali y
(B ei ung–Candelon
es )
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378
eedback causali y om INF o fiscal defici in India a all equencies. Thus, BC es
documen s ha fiscal defici need no be infla iona y in he sho - un, as he go e nmen can
empo a ily eso o o he sou ces o financing he defici ins ead o excess money c ea ion
in sho - un (Sa gen and Wallace, 1981;Ca ao and Te ones, 2005;Lin and Chu, 2013). The
ou come o his esul also alida es he in insically dynamic na u e o he ela ionship
be ween hese wo a iables. The pa s “c”and “d”o he figu e p o ides he esul s o
obus ness.
5.3 Asymme y analysis
Wi h a iew o p o ide some insigh s abou he possible asymme y, i any, exis s be ween he
a iables, he s udy applies NARDL model de eloped by Shin e al. (2014). We include INF,
GFD, CMR, GDPFC, TO and OPI a iables in o he NARDL e o co ec ion specifica ion (16).
Since none o he a iables is I(2), he applica ion o NARDL is jus ified [26]. In addi ion,
he adop ed me hodology would also ake no e o dynamic na u e o he ela ionship, as he
specifica ion pe mi s he lags o bo h dependen and independen a iables o influence he
dependen a iable and also allows o in insic dynamic adjus men .
In his case, as well, he null o no coin eg a ion is ejec ed like in he case o linea
Bounds F- es , as bo h he
BDM
and F
pss
es s, as epo ed a pa B o Table 5, a e ound o
Table 5.
Long and sho - un
asymme y esul s
(Model 16)
Asymme y esul s Long- un e ec (þ) Long- un e ec ()
Va iables Coe . F-s a p- alue Coe . F-s a p- alue
GFD 4.710 7.792 0.011* 0.071 4.236 0.049**
CMR 1.968 23.80 0.000* 0.522 4.466 0.046**
GDPFC 1.605 20.41 0.000* 1.911 22.06 0.000*
TO 0.389 2.012 0.170 0.723 3.542 0.073***
OPI 0.065 2.063 0.165 0.048 0.805 0.379
Long- un asymme y Sho - un asymme y
W
LR
W
SR
F-s a p- alue F-S a p- alue
GFD 4.706 0.041** 3.114 0.091***
CMR 18.64 0.000* 8.085 0.009*
GDPFC 4.516 0.045** 4.584 0.044**
TO 5.751 0.025** 3.044 0.095***
OPI 0.346 0.562 2.754 0.111
Coin eg a ion es F
PSS
BDM
4.450** 5.759**
Model diagnos ics Tes s a is ics p- alue
2
Sc 16.88 0.660
2
BPG 0.315 0.574
2
NOR 2.381 0.304
Ramsey F_ es 1.309 0.330
No es: INF= (GFD, CMR, GDPFC, TO, OPI). No e: FPSS and BDM a e he long- un coin eg a ion es
s a is ics. *; ** and *** deno e he 1%, 5% and 10% significance le els, espec i ely.
x
2
Sc ep esen he
po man eau se ial co ela ion es ,
x
2
BPG deno e he B eusch-Pagan-God ey he e oskedas ici y es ,
Ramsey Fis he RESET es and finally he Ja que-Be a no mali y es is deno ed by
x
2
NOR. Gene al o
specific app oach is ollowed, wi h an ini ial se up comp ising max p= max q= 2. The ele an 5% and
10% uppe bound c i ical alues o BDM o k= 5 (wi hou aking pa ial decomposi ion in o
conside a ion) a e 4.19 and 3.86 and o k= 10 (when pa ial sum decomposi ions a e independen ly
ea ed as eg esso s) a e 5.03 and 4.69. Simila ly, o he FPSS es he ele an 5% and 10% uppe
bound c i ical alues o k= 5 a e 3.79 and 3.35 and o k= 10 a e 3.24 and 2.94, espec i ely
Iden i ying
fiscal infla ion
in India
379
be s a is ically significan a 5% significance le el. The p esence o a long- un coin eg a ion
ela ionship in an asymme ic amewo k p o ides an indica ion o he infla iona y ole o
fiscal defici in India. We ollowed a gene al o a specific app oach o he es ima ion o
asymme ic ARDL e o co ec ion model [27]. We s a ed wi h maxp=q=2as decided by
AIC and SBC c i e ia’s and ze o es ic ions a e assigned o mos o he insignifican lags o
ensu e p ecision and a oidance o noise in o he dynamic mul iplie s. The pa C o Table 5
epo s he necessa y diagnos ic es s o he es ima ed model. Absence o se ial co ela ion is
accep ed in case o he Po man eau se ial co ela ion es
x
2
Sc, he e oskedas ici y in case o
B eusch-Pagan-God ey es
x
2
BPG,Ramsey RESET es (Ramsey F- es ) alida es he s uc u al
specifica ion o model and finally, p esence o no mali y is accep ed in he Ja que-Be a es o
no mali y
x
2
NOR. The e o e, he s abili y condi ions o es ima ed model a e ulfilled.
Wi h he de ec ion o long- un associa ion, we p oceed o examine whe he i is
symme ical o some asymme y is in ol ed. Wald’s es wi h a null o symme ical
associa ion be ween he a iables is es ed agains an al e na i e o asymme ical one. The
(W
LR
) and (W
SR
) es s a is ics a e shown in pa A o Table 5. The esul s documen he
p esence o an asymme ical long- un associa ion be ween INF and GFD, INF and CMR, INF
and GDPFC and INF and TO; howe e , he null o symme ical associa ion canno be
ejec ed be ween INF and OPI. The sho - un asymme y is also epo ed among he same
pai s o a iables and he null o symme ical associa ion canno be ejec ed again in case o
OPI as he W
SR
is ound o be s a is ically insignifican .
The long- un coe ficien s o he inhabi ed ela ionship o a ious a iables wi h he INF
a e shown in panel A o Table 5. In case o fiscal defici , GFD
þ
= 4.710 and GFD

=0.071.
The es ablishmen o a long- un di ec associa ion be ween he wo a iables p o ides an
empi ical suppo o he p ojec ions o Khund akpam and Pa anaik (2010) and a e in line
wi h he findings o Ranga ajan e al. (1989),Ramu and Gayi h i (2017),T an (2018). Su ge
in money supply (because o inc eased fiscal defici and capi al inflows) and he na owing
down o nega i e demand gaps in he economy p o ide a mani es a ion o infla iona y ole
o fiscal defici in India (Khund akpam and Pa anaik, 2010). The posi i e impac o fiscal
defici on he INF o India can be a ibu ed o he ansmission channels such as he
consump ion expendi u e channel, money supply channel, impo channel and he in e es
a e channel and acco ding o he heo e ical a gumen s o Keynesians, Neo-Classicals and
Mone a is s. In ac , Ramu and Gayi h i (2017) ha e exclusi ely acked he fi s h ee o
hese ansmission channels in case o India. Eme ging coun ies, like India, ea u ed wi h
high fiscal defici and public deb s ocks a e mo e exposed o infla iona y p essu es.
The e o e, owing o hei less fiscal space as may be needed o sus ainabili y, hese
economies a e ulne able o highe de aul isks.
The signs o posi i e and nega i e coe ficien s a e acco ding o heo y and bo h a e
s a is ically significan . Howe e , inc ease in fiscal defici is ound o be mo e infla iona y
and he dec eases in i s a ec s he INF wi h a lowe magni ude. In o he wo ds, he impac
o fiscal posi ion de e io a ion is mo e p onouncing and ha o any fiscal imp o emen is
milde o sluggish. Though i is no wi hin he scope o p esen s udy o p o ide he
unde lying easons o he asymme ic esponse o INF o posi i e and nega i e changes in
fiscal defici , howe e , he ele an heo e ical unde pinnings a e wo h men ioning.
The possible asymme y o fiscal defici on INF in case o India can be explained h ough
he exis ence o liquidi y cons ain s, consump ion-in es men downwa d inflexibili y
and he downwa d p ice s ickiness. Because o he exis ence o liquidi y cons ain s as
eflec ed h ough less de eloped c edi ma ke s and a la ge po ion o popula ion wi hou
adequa e pu chasing powe in India, any inc ease in fiscal defici would lead o an
exace ba ed inc ease in agg ega e demand because o addi ional pu chasing powe wi h he
JEFAS
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380
indi iduals wi h limi ed liquidi y hi he o and also enable indi iduals wi hou cons ain s
eel weal hie . Hence, impac on INF would be ela i ely highe . In case he defici is
educed, people find i di ficul o lowe he consump ion le els (Ra che e ec ) d as ically
along wi h in es men i e e sibili y, leading only o a ma ginal decline in demand
condi ions, and hence, a lowe e ec on INF is obse ed. The lowe impac o educed fiscal
defici s on INF can also be explained h ough downwa d p ice s ickiness. P oduce s a e
usually hesi an o p ice and wage educ ions o a oid he wo ke -employ conflic s, secu e
he wo ke mo ale and secu e some deg ee o p ice-se ing powe e en in a supply-
cons ained economy (Mohan y and John, 2015;Ba nichon e al.,2017). Thus, he e ec o
con ac iona y fiscal ac ion in- e ms o a decline in defici spending has a lowe e ec on
INF.
Coming o he impac o mone a y policy shocks as su oga ed h ough CMR o in e es ,
we ound ha he INF and in e es a e a e nega i ely ela ed whe ein a con ac iona y
policy shock lowe s i and an expansiona y one aises i . The es ablished nega i e
associa ion can ope a e h ough he con en ional agg ega e demand channel. Howe e ,
con ac iona y policy s ance is ound o be mo e e ec i e han he expansiona y one,
signi ying he asymme ic influence o mone a y policy ac ions on he INF o India. The
eason o his asymme y can be asc ibed o he beha io o demand condi ions because o
changing ou look o fi ms and consume s, he binding liquidi y cons ain s and he
downwa d p ice s ickiness unde al e na i e mone a y policy s ances (Mo gan, 1993;
Ba nichon e al., 2017). The changing ou look o fi ms and consume s could esul in he
asymme ic impac s, i he magni ude o pessimism is ela i ely high du ing economic
down u ns han hey a e op imis ic du ing expansions o i he business and consume
confidence ma e s mo e du ing ecessiona y condi ions [28]. As ela ed o he c edi
cons ain s, igh mone a y policy would be mo e e ec i e han an easy one i he o me
makes banks less willing o lend o some iskie (subp ime) bo owe s. An inc ease in
in e es a e by he cen al bank leads o an upsu ge in lending a es o comme cial banks
because o shi ing o inc eased cos s o he bo owe s. The high lending a es could, in u n,
inc ease he chances o bo owe ’s de aul and as a esul , banks become mo e isk-a e se
and e y choosy in he c edi supply, and hence, make hem liquidi y cons ained. This
leads o a lowe le el o in es men , a educ ion in household consump ion i.e. a educ ion in
demand condi ions, and hence, an app eciable all in he p ice le el (Ba nichon e al.,2017).
On he con a y, a cu in he in e es a es h ough an easy policy ac ion elimina e he c edi
cons ain s. Howe e , i he demand o c edi is lacking du ing an economic down u n,
slacking he liquidi y posi ion may no necessa ily augmen he bo owings and highe
spending. The e o e, impac o INF would be eeble. The subs an ial educ ion o INF
because o in e es a e hike can also be explica ed h ough he money supply channel. An
inc ease in in e es a e by he cen al bank leads o a ise in p ime lending a e, a decline in
c edi supply, a all in money supply ia money mul iplie p ocess and finally o a lowe
le el o he p ice le el. On he o he hand, a dec ease in he in e es a e du ing he e a ded
economic condi ions will no necessa ily lead o bo owing and spending augmen a ion o
all economic agen s in he economy, he e ec o expansiona y policy s ance on INF will,
he e o e, be ela i ely lowe [29](Ba nichon e al., 2017).
The impac o ou pu g ow h and decline as ep esen ed by he posi i e and nega i e-
sum componen s o GDPFC is well acco ding o he heo y, bu an asymme y is epo ed. A
nega i e g ow h in ou pu is ound o inc ease he INF ela i ely by a highe magni ude
han he posi i e g ow h is ound o educe i . A decline in he ou pu indica es he p esence
o supply cons ain s and gi en he demand condi ions (i no inc easing) he impac on
p ice le el will be highe . On he con a y, an inc ease in ou pu g ow h canno dec ease he
Iden i ying
fiscal infla ion
in India
381
p ices d as ically because o he p esence o he p oduce ’s p ice-se ing powe o some
ex en . Thus, in a supply-cons ained economy, downwa d p ice igidi y leads o he
asymme ic impac o ou pu changes on INF.
As ega d o he TO, al hough an asymme y is epo ed, he signs e u e he alida ion
o Rome (1993) hypo hesis in case o India. Specifically, he coe ficien o TO
þ
is 0.389
and ha o TO
-
is 0.723. The o me is s a is ically insignifican and he la e is
significan . The insignificance o TO
þ
may be because o i s ex-pos measu emen o
openness only and lacks he ex-an e measu emen . The nega i e componen is significan ,
howe e and he sign es ablishes a di ec associa ion be ween hese wo a iables. The
di ec link in case o India is in line wi h infla iona y impac o ou wa d –o ien a ion o
de eloping coun ies (E ans, 2007;Jalil e al., 2014;Ajaz e al.,2016).
Finally, as ela ed o he impac o OPI, hough signs a e heo e ically co ec , ye bo h
he posi i e and nega i e coe ficien s a e weak and s a is ically insignifican . The possible
explana ion o such insignificance a he seg ega ed asymme y le el is ha he global oil
p ices ha e been con e ed o domes ic oil p ices by mul iplying he o me wi h he
nominal EXR o he coun y conce ned. The mo emen s o he wo a iables, global oil
p ices and EXRs may no always be ein o cing bu some coun e -mo emen s a e also
possible. The e may be a all in global oil p ices, bu because o he inc eased demand om
he coun y a a lowe global p ice, i s EXR dep ecia es and he ini ial e ec o declining oil
p ices will now ge nega ed h ough inc easing EXRs, and hus, he o e all influence may be
insignifican . In case o India, he dep ecia ion o upee mo e han o se s he a o able e ec
o he ma ginal decline in global commodi y p ices on domes ic INF (RBI, 2013).
5.4 Cumula i e dynamic mul iplie s
The g aphical examina ion o dynamic e ec s o independen a iables on he INF can be
u he po ayed h ough dynamic mul iplie s, as shown in Figu e 4. The g aphs plo he
Figu e 4.
Cumula i e dynamic
mul iplie s o Model
16
0 2 4 6 8
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o GFD on INF
–0.05 00.05 0.1
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o OPI on INF
–2 –1 01
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o CMR on INF
–2 –1 0 1 2
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o GDPFC on INF
–2.5 –2 –1.5 –1 –0.5 0
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o TO on INF
JEFAS
25,50
382

dynamic e ec s o posi i e and nega i e changes in he fiscal defici , in e es a e, ou pu
g ow h, TO and OPI on he INF o India. The blue line indica es he line o asymme y and
he alue o his line a any gi en poin measu es he ex en o asymme y a ha poin .
Figu e 4 eplica es all he esul s epo ed in Table 5, hus confi ming he alidi y o abo e
discussions. In case o fiscal defici , asymme y is s onge om he posi i e change and
asymme y pe sis ence is obse ed e en in he long- un. As ela ed o he in e es a e
shocks, con ac iona y policy shock is mo e influen ial han he expansiona y one and he
asymme y is obse ed in bo h he sho and long- un. Simila ly, expansion in ou pu
g ow h declines INF ela i ely by a lowe magni ude han he inc ease in INF is caused by
ou pu decline. Finally, in case o OPI and TO, we ound he same phenomenon as epo ed
in Table 5. Howe e , he coe ficien s associa ed wi h posi i e change in TO and wi h bo h
posi i e and nega i e changes in case o OPI a e s a is ically insignifican . Mo eo e , i
akes a ound mo e han a yea on a e age o each o new equilib ium posi ion ollowing
any sho - un dis u bance.
5.5 Ex ensions
The obus ness o esul s is p o ided by using fiscal defici as a pe cen age o na ow
money in an economy as he key a iable o analysis. Table 6 and Figu e 5 eflec almos a
mi o image o Table 5 and Figu e 4, and he e o e, p o e he obus ness o esul s[30].
Al hough, he s udy has a emp ed o explo e he asymme ic na u e o he ela ionship
among selec ed a iables, howe e , ce ain ca ea s o his in es iga ion a e wa an ed and
an in ospec ion in o hese ca ea s may p o ide a scope o u he esea ch in he a ea. To
s a wi h, a mo e s uc u ed analysis wi h obus heo e ical unde pinnings may enhance
he unde s anding and findings o his s udy. Second, on he whole, una ailabili y o da a
Figu e 5.
Cumula i e dynamic
mul iplie s o Model
17
0.2 0.4 0.6 0.8 1
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o GFDD on INF
–3 –2 –1 01
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o CMR on INF
–2 –1 0 1 2
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o GDPFC on INF
–2.5 –2 –1.5 –1 –0.5
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o TO on INF
–0.04 –0.02 00.02 0.04 0.06
010 20 30 40
Time pe iods
posi i e change nega i e change
asymme y
Cumula i e e ec o OPI on INF
Iden i ying
fiscal infla ion
in India
383
o su ficien ly longe pe iods o ime ac ed bo h a challenge and hind ance o he
explo a ion o a mo e comp ehensi e analysis. Al hough, he asymme ies ha e been
obse ed in he empi ical exe cise wi h espec o he esponse o INF o a ious
mac oeconomic a iables and he p obable heo e ical easons we e ad oca ed, howe e , an
iden ifica ion o exac ansmission channels o asymme y would en ich he analysis.
6. Conclusion
Highe INF has always been conside ed as a g ow h e a ding ac o and a means o
educing he wel a e s anda ds o common masses. The e o e, main aining a s able p ice
le el ea u ing a low INF a e has emained a high p io i y objec i e o mac oeconomic
managemen o a ious economies including India. Among he many ac o s ueling he
infla iona y endencies in an economy such as mone a y shocks, s uc u al shocks, demand
shocks, ex e nal shocks and demog aphic changes, he issue o INF has also been ound o
be ela ed o fiscal policy decisions o he go e nmen . The p ima y pu pose o he s udy is
o e alua e he infla iona y endencies in India pa icula ly om he fiscal poin o iew. We
examined he causali y be ween fiscal defici and INF in a ime domain and FD amewo k.
We ound a unidi ec ional causali y unning om fiscal defici o INF in case o ime-domain
analysis and no eedback causali y is epo ed. Howe e , in case o FD design, causali y
om fiscal defici o INF is ound a low equencies only, i.e. no sho - un causali y is
Table 6.
Long and sho - un
asymme y esul s
(Model 17)
Asymme y esul s Long- un e ec (þ) Long- un e ec ()
Va iables Coe . F-s a p- alue Coe . F-s a P- alue
GFDD 0.671 8.812 0.007* 0.320 2.019 0.169
CMR 2.231 21.51 0.000* 0.657 6.137 0.021**
GDPFC 1.663 19.13 0.000* 1.841 17.89 0.000*
TO 0.363 2.362 0.139 0.656 3.670 0.064***
OPI 0.016 0.079 0.780 0.000 0.300 0.998
Long- un asymme y Sho - un asymme y
W
LR
W
SR
F-s a p- alue F-S a p- alue
GFDD 6.153 0.021** 3.269 0.084***
CMR 17.81 0.000* 9.697 0.005*
GDPFC 1.132 0.299 8.000 0.010**
TO 5.833 0.024** 6.908 0.015**
OPI 0.236 0.632 0.098 0.756
Coin eg a ion es F
PSS
BDM
4.721** 5.551**
Model diagnos ics Tes s a is ics p- alue
2
Sc 15.31 0.758
2
BPG 0.364 0.546
2
NOR 0.296 0.862
RAMSEY F_ es 0.607 0.163
No es: INF= (GFDD, CMR, GDPFC, TO, OPI). No e: F
PSS
and
BDM
a e he long- un coin eg a ion es
s a is ics. *; ** and *** deno e he 1, 5 and 10% significance le els, espec i ely.
x
2
Sc ep esen he
po man eau se ial co ela ion es ,
x
2
BPG deno e he B eusch-Pagan-God ey he e oskedas ici y es ,
Ramsey Fis he RESET es and finally he Ja que-Be a no mali y es is deno ed by
x
2
NOR. Gene al o
specific app oach is ollowed, wi h an ini ial se up comp ising max p= max q= 2. The ele an 5% and
10% uppe bound c i ical alues o
BDM
o k= 5 (wi hou aking pa ial decomposi ion in o conside a ion)
a e 4.19 and 3.86 and o k= 10 (when pa ial sum decomposi ions a e independen ly ea ed as
eg esso s) a e 5.03 and 4.69. Simila ly, o he F
PSS
es he ele an 5% and 10% uppe bound c i ical
alues o k= 5 a e 3.79 and 3.35 and o k= 10 a e 3.24 and 2.94, espec i ely
JEFAS
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384
es ablished, and hence, dynamic na u e o he ela ionship be ween he wo a iables is
jus ified. Using NARDL model, we examined he na u e o associa ion in an asymme ic
amewo k. The esul s documen he exis ence o an asymme ic long- un di ec
associa ion be ween fiscal defici s and INF. The ou come o his esul is an indica ion o he
infla iona y ole o fiscal defici in India. Howe e , he inc ease in he defici is ound o be
mo e infla iona y and he dec ease in fiscal defici is ound o a ec he INF wi h a lowe
magni ude. The possible asymme y o fiscal defici on INF can be explained h ough he
exis ence o liquidi y cons ain s, consump ion-in es men downwa d inflexibili y and he
downwa d p ice s ickiness.
The o he con ol a iables used in he empi ical exe cise also epo ed he
heo e ically plausible esul s. Con ac iona y mone a y policy ac ion is ound o be
mo e e ec i e han he expansiona y one, signi ying he asymme ic influence o
mone a y policy on he INF o India. Simila ly, in a supply-cons ained economy wi h
downwa d p ice igidi y, we ound an asymme ic impac o ou pu g ow h and ou pu
decline on INF. As ega d o he TO, al hough an asymme y is epo ed, he signs
e u e he alida ion o Rome (1993) hypo hesis in case o India. Finally, he impac o
OPI on he infla iona y p essu es is acco ding o heo y bu he coe ficien s a e de oid
o s a is ical significance.
The esul s documen ed abo e jus ified he applica ion o NARDL in o he empi ical exe cise.
Thus, ins ead o assuming he linea na u e o model specifica ion (wi h he associa ed possibili y
o inapp op ia e policy conclusions), we p oceeded wi h a well beha ed and heo e ically
suppo ed non-linea specifica ion o ake cognizance o dynamic na u e o he ela ionship and
ha o obse ed asymme ies. These esul s indica e some impo an policy ecommenda ions.
Fiscal consolida ion s a egy should be execu ed in an app eciable manne o achie e he sound
fiscal heal h and lowe INF. The disciplined fiscal s a egy would also be impe a i e o an
e ec i e mone a y policy. Mone a y au ho i ies should possess no iceable c edibili y o manage
he mac oeconomic sys em and policy s ances should be implemen ed acco ding o equi emen s
o he economy. G ow h in ou pu should be encou aged o ha e wo- old benefi s o he
economy – educing INF on he one hand and fiscal defici s on he o he [31].
No es
1. “Go e nmen s unning pe sis en defici s ha e soone o la e o finance hose defici s wi h
money c ea ion (seignio age), and hus p oducing infla ion”,Sa gen and Wallace (1981).
2. The Go e nmen o India b ough he Fiscal Responsibili y and Budge Managemen Ac , 2003
(FRBMA) since he Indian policymake s el he need o imp o e he fiscal posi ions and
amelio a e he mac oeconomic managemen o mo e owa d a nea ly balanced budge egime
ea u ed wi h s eng hened fiscal p udence. The Ac aimed a elimina ion o e enue defici
comple ely and educ ion o fiscal defici o a manageable le el o 3% o GDP by 2007. Howe e ,
because o he In e na ional financial c isis (2007-2008), he a ge s o he Ac we e ini ially
pos poned and la e suspended in 2009.
3. E en ecen ly, o he ele ance o fiscal consolida ion p ocess, he N.K. Singh panel (2017) was
se up o e iew he fiscal discipline s a egy in India. The Commi ee ad oca ed ha a ule based
fiscal policy by limi ing go e nmen deb , fiscal defici and e enue defici s o ce ain a ge s is
good o fiscal consolida ion in India. The panel ecommended he fiscal defici a ge o 2.5% o
GDP by he financial yea 2022-2023. Unlike he FRBM Ac , he epo ecommended a glide pa h
o he fiscal a ge s i.e. a s eady p og ess owa d hem and also sugges ed ha he e be some
flexibili y in he defici a ge s s ic ly acco ding o he needs o economy and ha oo wi hin an
accep able de ia ion om he main a ge s.
Iden i ying
fiscal infla ion
in India
385
4. In he case o Keynesians, an inc eased fiscal defici necessi a ed by an inc ease in public
expendi u e o ax cu leads o an inc ease in agg ega e demand and hence exe s an upwa d
p essu e on p ice le el in an economy (in case economy is ope a ing abo e ull employmen
le el) o enhances he le el o bo h ou pu and p ice le el (in case economy is ope a ing on
upwa d sloping agg ega e supply cu e). Howe e , in case o Elmendo and Mankiw (1999),
a ise in deb would esul in inc eased p ice le els by c ea ing a posi i e weal h effec on
households.
5. Specifically acco ding o FTPL, p ice le el in he economy is de e mined by he nominal deb o
p esen alue o u u e su pluses.
6. “I he ma ke has a nega i e pe cep ion on he sus ainabili y o he public deb , i will
ins iga e an inc ease in p ice le el o he ex en equi ed o es o e he go e nmen budge
cons ain . The highe p ice le el educes he eal alue o he p i a e po olios. The highe
he nominal go e nmen liabili ies, he g ea e he adjus men s equi ed in he p ice le el. As
a esul , he p esence o budge defici caused long- e m INF equa ion; wi h money g ow h
playing no ole may cons i u e a s ong suppo o he FTPL”(Lozano-Espi ia, 2008;Ramu
and Gayi h i, 2017).
7. E en hough T an (2018) in es iga ed he asymme ic impac s o fiscal imbalance on he key
mac oeconomic a iables, howe e , he explici explo a ion o he na u e o associa ion be ween
fiscal defici and INF has no been e alua ed by aking in o accoun he impo an de e minan s
o infla ion. In addi ion, only a pa ial asymme ic model is used and asymme y wi h espec o
fiscal defici is conside ed.
8. INF measu e in India has been usually p o ided by WPI because o he absence o a na ion-wide
ep esen a i e Consume P ice Index
9. Openness lacks a unanimously accep ed defini ion. The mul i ude o i s dimensions ende he
cons uc ion o one single index a he complex. While some “single indices”p o ide only a
measu emen o economic dimension o openness such as TO, he IMF’s es ic ions
measu emen , Chinn-I o index, e c., he “syn he ic indices”measu e i s economic, social, poli ical
and en i onmen al dimensions such as A.T. Kea ney/Fo eign Policy Globaliza ion, KOF,
Maas ich Globaliza ion Index, New globaliza ion index, e c. Each o hese indices suffe s om
diffe en limi a ions and he a ailabili y o sufficien da a p o es al oge he a se e e obs acle
(Goldbe g and Pa cnik, 2007). Wi h a iew o ake no e o he impac o economic dimension o
openness, we used he ade a io (sum o expo s and impo s exp essed as a pe cen age o GDP
o he coun y) as i s p oxy. Howe e , i is o be no ed ha openness a he is a wide e m and
includes ade policy ( es ic ions on ade), geog aphical and economic cha ac e is ics o he
coun y (Ajaz e al., 2016).
10. Wo ld c ude oil p ice is ep esen ed by he simple a e age o h ee spo p ices; UK B en , Wes
Texas In e media e and he Dubai Fa eh (COP) o be a ep esen a i e p ice o oil in India.
11. Fo a de ailed desc ip ion o he es e e o Toda and Yamamo o (1995).
12. These include pa ial di ec ed cohe ence and o he app oaches like hose o Geweke (1982) and
mo e ecen ly by B ei ung and Candelon (2006).
13. Fo a de ailed accoun o es e e o B ei ung and Candelon (2006).
14. Engle and G ange (1987), Phillips and Oulia is (1990) (single equa ion esidual es s), Johansen
(1988) and Johansen and Juselius (1990) (sys em coin eg a ion app oach), ARDL-Bounds es by
Pesa an and Shin (1998) (a modified single equa ion app oach wi h a posi i e edge o e Johansen
p ocedu e).
15. A posi i e shock may ha e a la ge impac in sho - un and a nega i e shock is ound o be mo e
influen ial in long- un (o ice- e sa).
JEFAS
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386
Abou he au ho s
Ja ed Ahmad Bha is a Doc o al Candida e a he School o Economics, Uni e si y o Hyde abad,
Hyde abad, India. His esea ch in e es s include empi ical mac oeconomics, Public policy and applied
ime se ies analysis. Ja ed Ahmad Bha is he co esponding au ho and can be con ac ed a :
[email p o ec ed]
Na esh Kuma Sha ma is P o esso and Dean School o Economics, Uni e si y o Hyde abad,
Hyde abad, India. His esea ch a eas include Economic Theo y, Gandhian Economic Though ,
De elopmen Science and Technology. He has augh cou ses such as Ma hema ical Economics,
Gene al Equilib ium, Social Choice Theo y and Time Se ies Econome ics.
Fo ins uc ions on how o o de ep in s o his a icle, please isi ou websi e:
www.eme aldg ouppublishing.com/licensing/ ep in s.h m
O con ac us o u he de ails: [email p o ec ed]
Table A2.
Nonlinea ARDL
e o co ec ion
Model 17
Va iables coe icien -s a is ic p- alue
Dependen a iable:DINF
INF 10.734 5.550 0.000
GFDDþ
10.761 3.010 0.006
GFDD
10.363 1.380 0.181
CMRþ
12.530 4.800 0.000
CMR
10.745 0.540 0.760
GDPFCþ
11.887 4.360 0.000
GDPFC
11.976 4.180 0.000
TOþ
10.412 1.560 0.133
TO
10.744 1.720 0.100
OPIþ
10.017 0.280 0.785
OPI
10.000 0.000 0.998
DGFDDþ
0.214 1.070 0.295
DGFDD
0.464 1.730 0.097
DCMRþ
12.117 3.110 0.005
DGDPFCþ
0.235 0.630 0.534
DGDPFCþ
10.756 0.200 0.740
DGDPFC
0.496 3.960 0.001
DTOþ
1.423 1.160 0.042
DTOþ
10.731 1.163 0.116
DTO
1.205 1.940 0.065
DOPIþ
0.057 1.070 0.298
DOPI
10.034 0.670 0.512
Cons an 3.759 1.290 0.209
No e: Gene al o specific app oach is ollowed, wi h an ini ial se up comp ising max p= max q= 2 and
mos o he insignifican lags a e elimina ed ou o ensu e he p ecision in cumula i e dynamic mul iplie s
Iden i ying
fiscal infla ion
in India
393