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STATE FISCAL POLICY AND INFLATION IN INDIA Sadananda Prusty* An increasing trend in fiscal deficit, especially revenue deficit, of all state governments in India has been noticed since 1987-88. The objective of this paper is to explore the relationship between state fiscal policies and inflation in India during the period 1989-90 – 2009-10. The Granger causality test result suggests that there exists a bi-directional causality between real GDP growth and inflation, and gross fiscal deficit and inflation. However, panel regression fixed effects result confirms that gross fiscal deficit of state governments is positively and significantly influencing inflation in India during the period. The above result suggests prudent state fiscal policies to control inflation in India. Keywords: State Government, Inflation, Time-Series Models JEL classification codes: H70, E31, C32 __________________________________________________ ∗ Dr. Sadananda Prusty, Professor in Economics, Institute of Management Technology Ghaziabad, India. Email: [email protected]
