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Fiscal transfers and inflation: evidence from India

Empirical Economics volume 63, pages 1837–1858 (2022)Cite this article

Abstract

Controlling for monetary policy, government transfers are potentially inflationary. This, however, may not be true when the economy is demand-constrained. Using panel data of 17 Indian states over 30 years, we show that government transfers via welfare programs do not lead to inflation. For identification, we use a narrative shock series of transfer spending based on the introduction of new welfare programs. We re-examine the relationship between government transfers and inflation by studying whether the recent implementation of India’s public workfare program, NREGA, had aggregate price effects. Using the phase-wise implementation design of the program, we confirm the absence of any association between higher program coverage and price inflation.

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Notes

  1. On the other hand, a decrease in marginal reward by way of less return to working or saving may dampen output and employment.

  2. The CPI numbers are from Indiastat.com.

  3. We also ran regressions using inflation calculated from the GDP deflator, and the results were qualitatively the same.

  4. We thank Thiemo Fetzer for sharing the rainfall data.

  5. To avoid counting the same expenditure twice, we leave out programs that were sub-schemes of more extensive programs.

  6. We also check specifications without the lag, and the results are no different. See Table 10 in “Appendix”.

  7. To check for the possibility of anticipation effects, we add a lead term. The result remains unchanged. See Table 11 in “Appendix”.

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Authors and Affiliations

  1. University of Western Australia (M251), 35 Stirling Highway, Perth, WA, 6009, Australia

    Girish Bahal

  2. Azim Premji University, Bangalore, 562125, India

    Anand Shrivastava

Authors
  1. Girish Bahal
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  2. Anand Shrivastava
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Correspondence to Girish Bahal.

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We are grateful to Amit Basole, Giancarlo Corsetti, Chetan Ghate, Douglas Gollin, Arjun Jayadev, Joakim Westerlund, and two anonymous referees and associate editor for comments and suggestions. We are also thankful to Krithika Raghavan for providing excellent research assistance.

Appendix

Appendix

See Fig. 4, Tables 7, 8, 9, 10, 11, 12 and 13.

Table 7 List of states by region
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Table 8 Inflation and transfer spending—with standard errors not clustered
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Table 9 Inflation and transfer spending two-stage least squares
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Table 10 Inflation and transfer spending, without including lags
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Table 11 Inflation and transfer spending—checking for anticipation effects
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Table 12 Inflation and transfer spending—with lagged dependent variable as a regressor
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Table 13 Inflation and transfer spending—cross-border spillover effects
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Bahal, G., Shrivastava, A. Fiscal transfers and inflation: evidence from India. Empir Econ 63, 1837–1858 (2022). https://doi.org/10.1007/s00181-021-02195-0

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