Purpose:

The paper investigates the inflationary tendencies in India from a fiscal point of view.

Methodology:

Toda and Yamamoto (1995) and Breitung and Candelon (2006) tests have been applied to investigate the nature of causality in time and frequency domain frameworks. For an asymmetric investigation, the study applies a Non-linear Autoregressive Distributed lag model (NARDL) given by Shin et al. (2014).

Findings:

We found a unidirectional causality from fiscal deficit to inflation and the absence of any feedback causality in case of a time-domain analysis. In the frequency domain design, causality from fiscal deficit to inflation is found at low frequencies only. Using the NARDL model, the results document evidence of asymmetric interactions. An increase in fiscal deficit is found to be more inflationary and a decrease lowers the inflation only meagrely. The asymmetric response may be due to the existence of liquidity constraints, consumption-investment downward inflexibility, and the downward price stickiness. All other variables affect inflation according to expected theoretical signs.

Practical implications:

Fiscal consolidation strategy should be executed appreciably for sound fiscal health and lower inflation. Monetary authorities should possess noticeable credibility for effective macroeconomic management.

Originality:

The novelty is ensured by the very nature of it, is the first study in the case of India to identify the fiscal inflation in an asymmetric configuration. Moreover, for an investigation of dynamic interaction, the nature of causality has been examined in a time domain and frequency domain frameworks.