A Comprehensive Analysis of Fiscal Deficit, GDP, Money Supply and Inflation in India

Abstract

This paper is to analysis the complex relationship between fiscal deficit, money supply, GDP growth, and inflation in India, Research has given more importance on these factors for economic stability and growth during 1970- 2020. Fiscal deficit occurs when the government revenue is less than expenditure made by the government, the result of which is an increase in the national debt. Government borrowings will leads to an increase in the money supply that will result to inflation introduce the purchasing power government uses fiscal and monetary policy to prevent and control the inflation and to support the growth of the economy. From 1971 to 2020, India’s GDP growth, inflation, and money supply were volatile. Ordinary Least Squares applied the long-run model to estimate the relationship between variables. Due to the risk of spurious results from unit root issues, further analysis was conducted using Augmented Dickey-Fuller test. ADF test results showed that GDP and inflation were stationary at their levels, and the money supply was stationary at its first difference. The ECM indicated that any short-term disequilibrium in GDP growth adjusts back towards its long-run path over time. The finding show a significant result which leads to confirmation that change in inflation and money supply has a significant impact in Indian economic growth in terms of short run and long run.