Fiscal Deficit and Inflation: Twin Problems in India

Indian economy is facing many problems like poverty, unemployment, current account deficit, high inflation, fiscal deficit and depreciation of rupee. In the present scenario, fiscal deficit and inflation are the alarming issues not only in India but also in the developed and developing economies. So there is a great need to study the impact of Inflation on fiscal deficit in the economy. Fiscal deficit is the excess of government spending over its revenue. Inflation is a continuous rise in the prices of commodities, leading to decline in the purchasing power of the consumers. Relationship between fiscal deficit and inflation is one of debatable issues. This paper is an attempt to find the impact of inflation on fiscal deficit in India. This paper also analyse the relationship between fiscal deficit and inflation with the help of regression analysis and Granger causality test. In this paper we find that inflation is not the reason for fiscal deficit and granger causality test shows that there is no significant relationship between inflation and fiscal deficit.