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International Journal of Social Sciences 
Arts and Humanities
(ISSN: 2321-4147) (Scientific Journal Impact Factor: 6.002)
UGC Approved-A Peer Reviewed Quarterly Journal










Review Paper

Impact of Inflation on Economic Growth in India: An Empirical Analysis


Shafia Zahra1[*] and Javed Akhtar2

1-Research Scholar, Department of Economics, University of Allahabad, Prayagraj, Uttar Pradesh, India.

2-Associate Professor, Department of Economics, University of Allahabad, Prayagraj, Uttar Pradesh, India.


Corresponding Author:

Shafia Zahra

Key words:

Inflation, Economic Growth, Liberalisation Privatisation Globalisation reforms

   ARTICLE DETAILS                  ABSTRACT

This study looks at the complex link that exists between India's economic growth and inflation from 1990 and 2022. India, whose economy is changing quickly, must simultaneously manage inflationary pressures and maintain strong economic development. The objectives of this research are to determine the ideal inflation threshold for maximum growth, investigate the relationship between these two crucial macroeconomic variables, and comprehend how inflation expectations affect economic activity. In order to capture the dynamic interactions between inflation and growth, the research article combines the use of time-series data with econometric models, such as the Engle Granger cointegration test, the Augmented Dickey Fuller test, and the error correction model. It is anticipated that the results would provide a more nuanced picture of how inflation affects economic growth in India and emphasize how crucial it is to keep inflation within a target range in order to promote sustainable development. The result shows that there is a long-run negative relationship between inflation and GDP growth rate in India. Inflation is harmful rather than helpful to growth. These results have important policy implications. In order to contribute to the larger conversation on macroeconomic stability and development in India, this research paper attempts to suggest policymakers on methods for striking a balance between inflation control and economic growth by offering empirical data and useful insights. The findings will provide insightful direction for formulating long-term economic success strategies that simultaneously lessen the negative impacts of inflation.






















  1. Introduction

India, the world's fifth-largest economy by nominal GDP, has experienced a significant economic transformation over the past few decades. This transformation began in earnest with the economic liberalization reforms of the early 1990s, which marked a shift from a predominantly agrarian and closed economy to a more diversified and globally integrated economic powerhouse. The year 1991 saw the beginning of economic liberalization in India, which was a turning point in the country's monetary policy framework and economic environment. India's economic policies were marked by significant government intervention, regulation, and protectionism before these changes. A paradigm change was brought about by the liberalization era, which placed an emphasis on deregulation, market-driven growth, and increased interaction with the global economy. These reforms included deregulation, reduction in import tariffs, and encouragement of foreign investment, which collectively spurred rapid industrialization and growth in the services sector. Despite these advancements, India's economic landscape is characterized by notable fluctuations in growth rates and persistent inflationary pressures. A major worry for economists and decision-makers throughout the world has been the complex link between inflation and economic growth. The inflation-growth trade-off is a phenomenon that presents both possibilities and major obstacles for economic management. Inflation in India has historically been driven by various factors, including supply-side constraints such as inadequate infrastructure and logistics, volatile agricultural production due to dependency on monsoons, fluctuating global commodity prices, and demand-side pressures from a growing population and expanding middle class. The interplay of these factors creates a complex environment for managing economic stability. It is essential to comprehend the trade-off between growth and inflation when creating monetary policy. If left unchecked, inflation weakens buying power, breeds uncertainty, and has the potential to topple the economy. On the other hand, raising living standards, lowering poverty, and creating jobs all depend on economic growth. The Reserve Bank of India (RBI), the nation's central bank, and other authorities have always sought to strike the correct balance between promoting growth and containing inflation.


The Reserve Bank of India (RBI), tasked with maintaining price stability, has employed various monetary policy tools to control inflation while supporting economic growth. These tools include adjusting interest rates, managing liquidity in the banking system, and regulating foreign exchange markets. However, the effectiveness of these policies has often been challenged by external shocks such as global financial crises, oil price volatility, and domestic structural issues like fiscal deficits and a high reliance on informal economic activities.


1.1    Trend Analysis of Inflation and Growth in India

The period since 1991 has seen significant changes in the conduct of monetary policy in India. The adoption of new monetary policy frameworks, tools, and targets has aimed to address the evolving economic challenges. This study seeks to analyse the inflation-growth trade-off in the context of these changes, exploring how the paradigms of monetary policy have shifted in response to domestic and global economic conditions.


1991-2000: Economic Liberalization and Growth

Inflation: The early 1990s saw high inflation due to various economic factors, including the balance of payment crisis. However, after economic liberalization measures were introduced in 1991, inflation gradually stabilized.


Growth: Economic reforms in the early 1990s led to increased foreign investment, industrial growth, and overall economic expansion. This decade is often referred to as a period of economic resurgence for India.


 2001-2010: Steady Growth and Moderate Inflation

Inflation: Inflation remained relatively moderate during this period, with some fluctuations due to global factors like oil prices and domestic factors such as food inflation.


Growth: India experienced steady economic growth during these years, driven by sectors like IT, services, and manufacturing. The GDP growth rate averaged around 7-8% annually.


2011-2020: Mixed Performance

Inflation: Inflation started to rise again in the early 2010s, primarily driven by food and fuel prices. The government implemented various measures to control inflation, but it remained a concern.


Growth: India faced challenges in sustaining high growth rates during this period due to global economic slowdowns, domestic policy issues, and structural challenges. GDP growth rates fluctuated between 5-8% annually.


2021-2022: Pandemic Impact

Inflation: The COVID-19 pandemic disrupted supply chains, leading to short-term inflationary pressures, especially in essential goods and services. Central banks took measures to manage inflation amidst economic uncertainty.


Growth: The pandemic caused a significant economic slowdown in 2020, followed by a gradual recovery in 2021 and 2022. Various fiscal and monetary policies were implemented to support growth and recovery.


Overall, India has seen a transformation in its economy over these decades, transitioning from a largely closed economy to a more open and globally integrated one. Inflation and growth trends have been influenced by both domestic policies and global economic conditions.


1.2    Importance of Studying the Inflation-Growth Relationship in India

Understanding the relationship between inflation and economic growth is crucial for several reasons. Firstly, inflation erodes the purchasing power of consumers, leading to a decrease in real income and potentially reducing overall consumption and savings. High inflation can also create uncertainty in the economy, affecting investment decisions by businesses and hampering long-term economic stability. Conversely, low or moderate inflation is often associated with economic growth, as it can stimulate spending and investment by reducing the real burden of debt. Economic growth, on the other hand, is essential for improving living standards, reducing poverty, and providing employment opportunities. In a developing country like India, sustained economic growth is critical for addressing socio-economic challenges such as income inequality, unemployment, and underdevelopment in rural areas. Therefore, policymakers need to strike a delicate balance between controlling inflation and fostering economic growth to achieve inclusive and sustainable development.


In the Indian context, this balance is particularly challenging due to the diverse and complex nature of the economy. Factors such as the significant contribution of agriculture to GDP, regional disparities, and the role of informal sectors add layers of complexity to the inflation-growth nexus. Additionally, India's integration into the global economy exposes it to external economic shocks, further complicating the task of managing inflation and sustaining growth. For instance, a rise in global oil prices can lead to cost-push inflation, affecting various sectors of the economy and putting upward pressure on domestic prices.


  1. Review of Literature

Friedman, M. (1968) Milton Friedman introduced the concept of the natural rate of unemployment and emphasized the long-term neutrality of money. He argued that inflation is always a monetary phenomenon and that monetary policy can only affect real variables in the short run.


Barro, R. J. (1995) Barro examined cross-country data and found a negative relationship between inflation and economic growth. His findings suggest that higher inflation rates tend to reduce economic growth, primarily through reduced investment and productivity growth.


Sarel, M. (1996) Sarel identified a threshold effect of inflation on economic growth. His study suggests that inflation below a certain threshold level may not have significant adverse effects on growth, but beyond this threshold, the negative impact on growth becomes more pronounced.


Khan, M. S., & Senhadji, A. S. (2001)This paper explores the nonlinear relationship between inflation and growth, suggesting that low to moderate levels of inflation may not harm growth, but high inflation rates are detrimental. They identify threshold levels of inflation for developing and developed countries.


Ghosh, A., & Phillips, S. (1998) Ghosh and Phillips find that inflation is negatively associated with growth, with the effect being more severe at higher inflation rates. They emphasize the importance of maintaining low inflation to foster economic growth.


Bruno, M., & Easterly, W. (1998) The authors analyse inflation crises and their impact on long-term economic growth. They conclude that moderate inflation does not harm growth, but inflation crises—characterized by very high and volatile inflation rates—have significant negative effects on growth.


Mishkin, F. S. (2007) Mishkin discusses the dynamics of inflation and its implications for monetary policy. He highlights how expectations of future inflation play a crucial role in the inflation process and the importance of central bank credibility in managing inflation expectations.


Rangarajan, C. (1998) Rangarajan provides an in-depth analysis of India's monetary policy and its impact on inflation and growth. He discusses the role of the Reserve Bank of India in managing inflation and promoting economic stability through various policy measures.


Balakrishnan, P., & Parameswaran, M. (2007) This study focuses on the factors driving economic growth in India, including the role of inflation. The authors argue that moderate inflation, if managed well, can coexist with high economic growth and emphasize the need for structural reforms to sustain growth.


Jha, R., & Dang, T. (2012) Jha and Dang examine how inflation variability affects the inflation-growth relationship in developing countries, including India. They find that high inflation variability exacerbates the negative impact of inflation on growth, stressing the importance of stable inflation rates for economic development.

The literature on the relationship between inflation and economic growth is extensive, highlighting a consensus on the adverse effects of high inflation on economic growth. Studies such as those by Barro (1995) and Ghosh and Phillips (1998) emphasize the negative correlation between inflation and growth, particularly at higher inflation rates. The concept of a threshold level of inflation, as explored by Sarel (1996) and Khan and Senhadji (2001), suggests that low to moderate inflation may not significantly harm growth, but beyond a certain point, the negative impact intensifies.

Behavioural insights, such as those discussed by Mishkin (2007), underscore the role of inflation expectations in shaping economic outcomes. The Indian context, addressed by Rangarajan (1998) and Balakrishnan and Parameswaran (2007), reveals the complexities of managing inflation in a diverse and rapidly developing economy.

This review of literature provides a foundational understanding for the current study, which aims to investigate the specific dynamics of inflation and economic growth in India, identify optimal inflation thresholds, and assess the role of inflation expectations in influencing economic activity. The findings will contribute to informed policymaking and strategies for achieving balanced and sustainable economic growth in India.


  1. Objective

To analyse the historical trends in inflation and economic growth in India from 1990 to 2022

To provide policy recommendations based on the empirical findings



H0: There is no significant relationship between inflation and economic growth in India

H1:  There is a significant relationship between inflation and economic growth in India


  1. Research Methodology

The secondary data for this research was obtained from the Reserve Bank of India's official website, focusing on two primary variables: the Consumer Price Index (CPI) as an indicator of inflation, and the Gross Domestic Product (GDP) growth rate as an indicator of economic growth. Initially, the stationarity of these variables was checked using the Augmented Dickey-Fuller (ADF) test. The results indicated that both CPI and GDP growth were non-stationary at their levels. However, after taking the first difference of the data, both series became stationary. Following this, a regression analysis was conducted on the first differenced data to examine the relationship between CPI and GDP growth.


To further validate the findings, the stationarity of the residuals from the regression was tested using the ADF test, which confirmed that the residuals were stationary at their level. This suggested a potential cointegration between the CPI and GDP growth series. To delve deeper, the Engle-Granger cointegration test was employed to assess the long-term relationship between the variables. The test results indicated that the series were cointegrated, signifying a long-term equilibrium relationship between CPI and GDP growth. Subsequently, an Error Correction Model (ECM) was developed to capture both the short-term dynamics and the long-term equilibrium relationship between the two variables.


Table 1:  Augmented Dickey Fuller test GDP at Level

At level: GDP series non stationary






Table 2:  Augmented Dickey Fuller test GDP at First difference

At first difference: series stationary


Table 3:  Augmented Dickey Fuller test CPI at Level

At level: series non stationary


Table 4:  Augmented Dickey Fuller test CPI at first difference

At first difference: series stationary


Table 5: Regression analysis GDP as dependent variable

The model has a very high R-squared value, suggesting that CPI explains a significant portion of the variation in GDP.The coefficient for CPI is positive, indicating that there is a positive relationship between CPI and GDP. However, it's not statistically significant at the typical significance levels (p-value > 0.05), suggesting caution in interpreting the impact of CPI on GDP.The F-statistic is highly significant, indicating that the model as a whole is statistically significant.The Durbin-Watson statistic is very low (0.581611), suggesting potential autocorrelation in the residuals, which could affect the reliability of the model.


Table 6: Regression analysis CPI as dependent variable


The model has a very high R-squared value, suggesting that GDP explains a significant portion of the variation in CPI. The coefficient for GDP is positive, indicating that there is a positive relationship between GDP and CPI. Moreover, it's statistically significant at the 1% level, indicating a strong impact of GDP on CPI. The F-statistic is highly significant, indicating that the model as a whole is statistically significant. In summary, the model indicates that GDP has a statistically significant impact on CPI, explaining a significant portion of its variation.


Table 7: Residual series

Residual series: Stationary at the level it means variables are cointegrated and the regression that we have run is not spurious



Table 8: Engle granger Cointegration test



Cointegration test between CPI (Consumer Price Index) and GDP (Gross Domestic Product) shows that both CPI and GDP have tau-statistics and Z-statistics with p-values below the conventional significance level of 0.05 (indicated as 0.0030 and 0.0031, respectively). This suggests that the null hypothesis of no cointegration is rejected, indicating a long-term relationship between CPI and GDP.


Regarding the intermediate results, the number of stochastic trends in the asymptotic distribution is crucial for interpreting cointegration results. Both GDP and CPI have one stochastic trend, which aligns with the theory of cointegration, where variables with the same number of stochastic trends can have a long-term relationship.








Table 9: Error Correction Model for CPI on GDP

The model suggests that DGDP and the constant term have a significant impact on DCPI, while the lagged error correction term (LAGGED ECT) does not appear to be significant.


Table 10: Error Correction Model for GDP on CPI


DCPI has a significant positive impact on DGDP. This implies that changes in DCPI are associated with notable changes in DGDP. The lagged error correction term also influences DGDP positively, indicating a long-term relationship or adjustment process between the variables. However, the constant term is not significant, suggesting that the intercept may not provide meaningful information for predicting DGDP in this model.


Overall, the model suggests that DCPI and the lagged error correction term are important predictors of DGDP, while the constant term is not significant. Autocorrelation in the residuals may need to be addressed for a more robust model.


From above two Error Correction Model following results can be interpreted

For the GDP model, the significant coefficients for DCPI and the lagged error correction term along with a higher R-squared value suggest a stronger and more meaningful error correction mechanism. This means that changes in DCPI and adjustments towards equilibrium have a substantial impact on GDP.


On the other hand, for the CPI model, while GDP does have a significant impact, the significance of the lagged error correction term is weaker, implying that the correction mechanism for CPI may not be as robust as in the GDP model.

So, based on these interpretations, results of error correction model suggests that the model with GDP as the dependent variable has a more meaningful and stronger correction mechanism compared to the CPI model.


  1. Conclusion

The motivation behind this study stems from the latest advancements in the field on the correlation between inflation and growth, as well as the seemingly incongruous data presented for both rich and developing economies. The cointegration and error correction models have been utilized in this work to use yearly data to empirically investigate the short- and long-term dynamics of the inflation-economic growth link in India. One of intriguing findings of the study is the inverse relationship between inflation and economic growth.


The Engle-Granger cointegration test results indicate a statistically significant long-term relationship between GDP and CPI, with CPI exerting a negative influence on GDP in the long run. Further analysis using the Error Correction Model (ECM) reveals that the model with GDP as the dependent variable exhibits a stronger and more meaningful error correction mechanism compared to the CPI model. The significant coefficients for DCPI (Delta Consumer Price Index) and the lagged error correction term in the GDP model, along with a higher R-squared value, indicate a robust correction mechanism. This implies that changes in DCPI and adjustments towards equilibrium have a substantial impact on GDP. On the other hand, while GDP does have a significant impact on the CPI model, the significance of the lagged error correction term is weaker, suggesting that the correction mechanism for CPI may not be as robust as in the GDP model.


In conclusion, the analysis highlights the importance of considering both GDP and CPI dynamics in understanding the long-term relationship between inflation and economic growth. The findings support the existence of a cointegrating relationship between GDP and CPI, with CPI playing a significant role in influencing economic growth dynamics over time. Based on the analysis of the cointegration test and the Error Correction Model (ECM) results, here are some policy recommendations such as Given the negative long-term relationship between GDP and CPI, policymakers should focus on coordinating monetary policies to manage inflationary pressures while promoting sustainable economic growth.


This coordination can involve setting appropriate interest rates, managing money supply, and monitoring inflation expectations. Implementing an inflation targeting framework can help anchor inflation expectations and maintain price stability. Central banks can set clear inflation targets and use monetary policy tools to achieve these targets, thereby contributing to a stable economic environment conducive to growth. Fiscal policies should be aligned with economic goals to support long-term growth while controlling inflation. This includes prudent government spending, efficient tax policies, and measures to improve fiscal discipline and transparency. Structural reforms aimed at enhancing productivity, promoting investment in key sectors, and improving the business environment can boost economic growth without leading to significant inflationary pressures.


These reforms may include labour market reforms, infrastructure development, and regulatory simplification. Continuous monitoring and analysis of economic data, including GDP, CPI, and other relevant indicators, are crucial for policymakers to make informed decisions. Regular assessments of the cointegration relationship between GDP and CPI can guide policy adjustments and fine-tuning. Investing in human capital, education, and skill development can enhance the economy's capacity to innovate, adapt to technological advancements, and sustain long-term growth without excessive inflationary effects. Trade policies that promote exports, encourage foreign direct investment (FDI), and foster economic integration can contribute to economic growth while mitigating inflationary pressures through increased competitiveness and market access. Strengthening financial sector regulations, enhancing risk management practices, and ensuring the stability of financial institutions are essential for maintaining macroeconomic stability and supporting sustainable growth.


To ensure a balanced approach to economic management, policymakers should prioritize monetary policy coordination, inflation targeting, and fiscal reforms. This includes aligning fiscal policies with growth objectives, implementing structural reforms to enhance productivity and investment climate, and fostering international trade integration. Additionally, continuous data monitoring and analysis, coupled with capacity-building initiatives and measures to promote financial stability, are crucial for sustaining long-term growth while managing inflationary pressures. By adopting these policies, policymakers can foster an environment conducive to economic stability, resilience, and sustainable growth in the face of evolving global economic dynamics.





6.       References

Balakrishnan, P., & Parameswaran, M. (2007). "Understanding Economic Growth in India: A Prerequisite". Economic and Political Weekly

Barro, R. J. (1995). "Inflation and Economic Growth". NBER Working Paper

Bruno, M., & Easterly, W. (1998). "Inflation Crises and Long-Run Growth". Journal of Monetary Economics

Enejoh, S. Y., & Tsauni, A. M. (2017). An analytical study of the impact of inflation on economic growth in Nigeria (1970-2016). International Journal of Academic Research in Accounting, Finance and Management Sciences, 7(4), 110-120.

Friedman, M. (1968). "The Role of Monetary Policy". American Economic Review.

Ghosh, A., & Phillips, S. (1998). "Warning: Inflation May Be Harmful to Your Growth". IMF Staff Papers

Guptha, K. S., & Rao, R. P. (2017). An Empirical Analysis of Growth and Threshold Inflation in India. Indian Journal of Economics and Development, 13(1), 23-28.

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Jha, R., & Dang, T. (2012). "Inflation Variability and the Relationship between Inflation and Growth". Macroeconomics and Finance in Emerging Market Economies

Khan, M. S., & Senhadji, A. S. (2001). "Threshold Effects in the Relationship Between Inflation and Growth". IMF Staff Papers

Mishkin, F. S. (1999). "International Experiences with Different Monetary Policy Regimes". Journal of Monetary Economics.

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[*]Author can be contacted at: Research Scholar, Department of Economics, University of Allahabad, Prayagraj, Uttar Pradesh, India.

Article details: Received: 18- May-2024; Sent for Review on: 22-May-2024; Draft sent to Author for corrections: 30- May-2024;  Accepted on: 19-June- 2024

Online Available from 25-June- 2024

DOI : 10.13140/RG.2.2.21915.68644

Paper ID:  IJSSAH: 2024-39/© 2024 CRDEEP Journals. All Rights Reserved.