Against the backdrop of the fiscal-rules based reforms, this paper empirically investigates the determinants of inflation in India. The paper upfront has been kept free from adherence to any particular school of thought on inflation, particularly fiscal theories of price determination (where inflation targeting is emphasised) and the monetarist axioms. Using the ARDL methodology, the determinants of inflation based on Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have been empirically tested for the financially deregulated period. The results reveal that fiscal deficit is not a significant variable that affects inflation instantaneously. However, the lagged variable of deficit and output gap were found to be significant in determining inflation in a few models. The supply side variables are indeed significant and have considerable effect on inflation. This result has fiscal policy implications especially in the context of a shift from discretion to rule-based fiscal framework in the context of India.

 

Keywords: Fiscal Reforms, Inflation, Supply Side, ARDL

JEL Classification: C 22, E 31, E 51, H 62