Inflation in India : Causes and Anti-Inflationary Policy Perception

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