Inflation Dynamics in India: Unraveling the Role of Fiscal Deficit, Industrial Production, and Oil Prices

This study examines the determinants of consumer inflation in India using monthly data from January 2013 to March 2025. Focusing on key macroeconomic drivers, namely fiscal deficit (FD), industrial production (IIP), and crude oil prices (OIL), the analysis employs Johansen Cointegration and Granger Causality tests to explore both long-run and short-run relationships. The Johansen test identifies two cointegrating equations, indicating a long-run equilibrium relationship among inflation and its determinants, while the Granger Causality results reveal significant bidirectional and unidirectional causality patterns between inflation and the selected variables. Specifically, fiscal deficit and industrial production exert substantial long-term influence on consumer inflation, while oil price fluctuations affect inflation through imported cost pressures. The findings underscore the multidimensional nature of inflation in India, shaped by both domestic policy and external factors. The study offers important policy implications, including the need for fiscal prudence, industrial capacity strengthening, and energy diversification to manage inflation effectively. These results contribute to a deeper understanding of inflation dynamics and provide guidance for macroeconomic policy formulation in India.