Determinants of Inflation in India

The present study is an attempt to identify the key determinants of inflation in India. Meanwhile it tries to empirically investigate the recently boasted argument that India’s inflation is mainly attributed to higher purchasing power of the people due to better economic growth amid increased social sector spending. To serve the purpose, annual time series data is utilized ranging from 1981 to 2011. Co-integration method is used to identify the long-run relationship followed by error correction model for short-run relationship among the inflation and other macro-economic indicators. It is found that there is presence of long-run relationship between inflation, money supply, private and social spending and exchange rate in India. Money supply, exchange rate and private final consumption expenditure contribute the inflation significantly. Moreover, the results exhibit the short-run relationship for select variables.

Authors Name: 
Dr. Ashwani