Government Expenditure and Inflation in India: An Empirical Analysis

Abstract

In any economy, inflation increases with an increase in economic growth and government size. However, when inflation increases beyond a certain undesirable level, it becomes a problem for the economy and hurts economic growth. The central bank uses various techniques to tackle inflation and reduce the possibility of harmful increase in it. Since India is a developing country, the government expenditure plays a crucial role and provides an important stimulus to economic growth. The main focus of this study is on the correlation between government spending and inflation in the country and its impact over the period 1983–2020. Along with that, the impact of gross domestic product and money supply has also been studied for the same time period. The results of the study suggest that in India, increase in an government expenditure causes an increase in inflation, and the other two variables also share a similar relationship with inflation.