Identifying Fiscal Inflation in India - Some Recent Evidence from an Asymmetric Approach

Maintaining a stable price level featured by low inflation rate has remained a prioritized objective of macroeconomic management of all the economies including India. Among many other determinants, this study examines the issue of inflation from the fiscal point of view. A unidirectional causality from fiscal deficits to inflation is reported in time domain causality framework, however only the long-run causality in the same direction is found in frequency domain design, validating the dynamic nature of the association between two variables. Under an asymmetric econometric framework, the existence of a long-run association is documented between deficits and inflation indicating the existence of fiscal dominance in India and the applicability of the fiscal theory of price level. The expansionary fiscal stance is found to be more inflationary and the decreases in fiscal deficits are found to affect the inflation with a lower magnitude. The possible asymmetry of fiscal deficits on inflation can be attributed to the existence of liquidity constraints and the downward price stickiness. The other control variables are found to report the theoretically plausible results. The study recommends the fiscal consolidation, monetary policy credibility, output growth and import substitution measures for a growth conducive and welfare-oriented price level in the economy.


Introduction
Higher inflation has always been considered as a growth retarding factor and a means of reducing the welfare standards of common masses. Therefore, maintaining a stable price level featured by low inflation rate has remained a prioritized objective of macroeconomic management of all the economies including India. Among the many factors fuelling up the inflationary tendencies in an economy like monetary shocks, structural shocks, demand shocks, external shocks and demographic changes, the issue of inflation has also been found related to fiscal policy decisions of Govt. The fiscal theory of price level (Leeper 1991;Sims 1994 andWoodford 2001) and the seminal work of Sargent and Wallace (1981) developed the theoretical contours for the establishment of an interaction between inflationary pressures in an economy and the Govt budgetary imbalances. The former mentions the role of complementarity between monetary and fiscal policies for the price level determination and to ensure the stable price level the theory suggests sustainability of Govt finances. The latter highlights the role of relative dominance of monetary and fiscal authorities in the determination of price level. In a monetary dominance regime, fiscal authorities abide with the decisions of independently determined monetary policy and are constrained to follow a fiscal discipline strategy to avoid the inflationary pressures in the economy. On the contrary in a fiscal dominant regime, fiscal authorities determine the level of current and future fiscal imbalances and thereby constrain the monetary authority for the demand of Govt bonds. This leads to excess money creation through debt monetization and hence inflationary uprisings are noticed 3 .The deficits could be financed either through the imposition of higher taxes or domestic or external borrowings. However, developing countries quite often used to finance their deficits by debt monetization due to the high costs associated with higher tax rates, political instability and market borrowings. As a result, fiscal view of inflation is more reported in developing countries than in the developed countries featured with efficient tax collection system and considerable access to external borrowings (Catao and Terrones 2005).
The present study aims at to examine the impact of fiscal deficits on the inflationary tendencies of Indian economy. Though several studies have been conducted to make an analysis of two variables (mentioned in literature) in the Indian context, the deficit-inflation nexus has not been evaluated exhaustively and the evidence reported by earlier studies remained inconclusive. India is chosen as a candidate for analysis due to its vibrant inflation dynamics and its downward inflexibility of deficit financing. The deficit financing has always been considered a viable instrument to avoid any recessionary tendencies in the economy. However, recognizing the adverse impacts of excess deficits, the Govt followed the fiscal consolidation program through FRBM act  and finalized the pro-growth targets for fiscal imbalances. The recent fiscal response to the global crisis after the suspension of fiscal targets not only enabled India to avoid the crisis at home but also continue along its growth trajectory as well. The move, however, represented the deviation from the fiscal discipline path. Even though the efforts have been made to curtail the deficit figures appreciably, the economy is still plagued with persistent deficit figures of 3.52% of GDP in 2016-17. In light of swelling deficit figures and vibrant inflationary phenomenon in the economy, it would, therefore, be important to examine the possible interaction between the two variables. Though the inflationary rise in India has been theoretically ascribed to both domestic and foreign factors and to both supply and demand shocks, however, the empirical evidence reported is inadequate. The possible reason for such an inadequacy could be the changes in determinants of inflation over the period of time. Therefore the study is an attempt to analyze the inflationary phenomenon of India from the viewpoint of fiscal deficits with a view to sort out the likely role of later in explaining the overall inflation. The study adopted a broader analytical framework to include all the potential determinants of inflation in addition to fiscal deficits. Data for a period 1970-2016 has been examined to provide a heuristic evaluation of Indian inflationary problem with some recent evidence. The study will contribute to the existing literature in the following ways. Firstly, the nature of causality between fiscal deficit and inflation will be examined in a time domain and frequency domain framework in order to portray precisely the casual interactions between the two variables in the short run and long run. Secondly, we will apply a recently developed non-linear Auto Regressive Distributed Lag (NARDL) model, developed by Shin, Yu and Greenwood-Nimmo (2014) to examine the existence of any cointegrating relationship in an asymmetric framework between deficits and inflation in India.

Literature Review
The issue of inflation has always been at the core of theoretical and empirical debates. Scholars have analyzed the inflationary tendencies in various countries with different datasets, different determinants and different econometric methodologies. So far as the impact of fiscal deficits on the inflation is concerned, Hamburger and Zwick (1981) found the inflationary nature of budget deficits while analyzing the United States data for a period 1954-1976. The authors also reported the stronger effect of budget deficits on inflation in the Keynesian regime (1961)(1962)(1963)(1964)(1965)(1966)(1967)(1968)(1969)(1970)(1971)(1972)(1973)(1974). Dwyer (1982) did not find any impact of debt on the price level and money stock. Ahking and Miller (1985) while analyzing the quarterly data for the period 1947-1980, documented the existence of deficit-Inflation relationship only in some specific periods. Darrat (1985) found money growth and fiscal deficits as the significant determinants of increased price levels. King and Plosser (1985) reported the existence of small deficit-seigniorage relationship within a neoclassical macroeconomic framework. Moreover, King and Plosser (1985) failed to uncover any such relationship while examining a mix of 12 developed and developing countries. Giannaros and Kolluri (1986) examined the data from 10 developed countries and found the absence of any impact of fiscal deficits on inflation and money supply. Protopapadakis and Siegel (1987) also reported the existence of a feeble association between debt-money and the debtinflation in case of 10 advanced countries for the period 1952-1987. In addition, the impact of debt growth on the inflation is also found weak. Barnhart and Darrat (1988) examined the causality between deficits and money growth in case of 7 industrial countries and found the absence of any unidirectional or feedback Granger causality between the two variables.
In case of 17 developing countries and for a time period from 1961to 1985, De Haan and Zelhorst (1990 found the absence of any evidence in favor of "fiscal dominance hypothesis" and reported the presence of correlation between fiscal deficits and inflation only during high inflation episodes. Metin (1998) documented the inflationary impact of fiscal deficits in case of Turkey. However, Komulainen and Pirttila (2002) reported the neutrality of fiscal deficits in explaining the inflationary process in case of three transition economies (Russia, Bulgaria and Romania). Similarly Loungani and Swagel (2003) found the puny association between fiscal balance and inflation in case of 53 developing countries, however, the relationship becomes stronger in case of economies with higher average inflation. The authors further reported the non-linear impact of fiscal deficits on inflation and found that the former affects the later significantly only when the magnitude of former is above 5%. Quite recently Domac and Yucel (2005) while applying pooled probit estimation in case of 15 emerging economies document the inflationary role of fiscal deficits. Recently, Nguyen (2015) also reported the direct impact of fiscal deficits on inflation in case of eight selected economies of Asia.
Some scholars were interested to examine the deficit-inflation nexus in case of a mix of developed and developing countries together in a panel setting and reported a diversity of results. For instance, Karras (1994) found that fiscal deficits are non-inflationary in case of a panel of 32 developed and developing countries. Similarly, Click (1998) examined the cross-country data of 90 countries for a period from 1971 to 1990 and reported the absence of any impact of domestic debt on inflation. However, Cottarelli et al. (1998) found the significant impact of fiscal deficits on inflation along with inflation persistence in case of a mixed panel of 47 countries. Laasch et al. (2002) analyzed a large data set consisting of 94 countries during 1960-1995 and found the statistically significant and positive impact of fiscal deficits on inflation and seigniorage. The study further reported the significant role of fiscal deficits in determining the seigniorage and inflation in case of high inflation periods and in case of countries with high average inflation. Catao and Terrones (2005) examined a data set comprising of 109 countries over a period of 1960-2001 to account for possible short-run and long-run interactions between fiscal deficits and inflation. The study reported the inflationary impact of deficits in case of developing and high inflation economies, but not in case of low-inflation and developed countries. Similarly, Kwon et al. (2009) evaluated the debt-inflation nexus in case of 71 countries over a period from 1962 to 2004. Debt growth is found significantly and appreciably inflationary in indebted developing countries and the impact is less in other countries of the panel. More recently, Lin and Chu (2013) while analyzing the data of 91 countries for a period 1960-2006, found that the impact of fiscal deficits on inflation is more in magnitude when the rate of inflation is high and weak in the low inflation episodes.
The deficit inflation interaction has also been examined in the case of Indian economy. Sarma (1982), Jhadav (1994 and Ragrarajan & Mohanty (1998) have found the existence of a perennial interaction between fiscal deficits and inflation in both forward and feedback directions. In addition, these studies have reported the fiscal deficit among the important determinants of inflation in India. The outcome of these studies is relevant to the prevailing conditions of that time. With the permanent blockade of ad hoc treasury bills in 1996-97, market borrowings used to finance deficits ceased as an option and mode of monetization was resorted. However, even after accounting for monetization period of deficit financing in an extended data set analysis, Ashra et al. (2004) reported the absence of long-run association between Reserve Bank credit & fiscal deficit and between money & Reserve Bank credit to the government. The study, therefore, recommended the scrapping of fiscal deficit as a stabilization tool. Using a more recent data set and an updated methodology, Khudrakhpam and Goyal (2009) reported the significant contribution of fiscal deficit in the incremental reserve money creation and overall money expansion, which finally leads to inflation in the economy. Similarly, Khudrakpam and Pattanaik (2010) found the significant impact of fiscal deficits on inflation. Recently, Mohanty and John (2015) applied the time-varying structural VAR procedure to analyze the time-varying impact of various determinants of Inflation in India. This study also reported the inflationary impact of fiscal deficits.
The above literature survey highlighted the fact that on average deficits are less inflationary in advanced and low inflation countries characterized by sound and credible monetary authorities and less fiscal dominance. However, the deficits are found to be inflationary in developing countries, in countries with higher inflation rates and high inflation periods. So far as India, in particular, is concerned, the deficit-inflation nexus has not been evaluated exhaustively and the evidence reported by earlier studies remained inconclusive. The present study, therefore, is an attempt to analyze the inflationary impact of fiscal deficits in a new methodological setup and with an updated and extended dataset in case of India. Taking note of dynamic nature of the relationship between fiscal deficits and inflation, the study will examine the deficit inflation nexus in a dynamic and asymmetric framework. The novelty of the study is ensured by the very nature of it is the first study in case of India to identify the fiscal inflation in an asymmetric framework and as well to examine the causality between the two variables in both short-run and long-run.

Theoretical Framework
The impact of fiscal deficits on inflation has been discussed in the celebrated work of Sergent and Wallace (1981) in a framework of "monetary dominance" and "fiscal dominance" regimes. Given that the deficit is financed either through bond sales to the public or through the seigniorage created by monetary authority or by a combination of both. In the case of an independent monetary authority framework, fiscal authority is constrained in the formulation of its policy. In this regime of monetary dominance, money supply can be regulated and fiscal deficits would tend to be noninflationary. On the contrary in a fiscal dominance regime, the regulation of money supply by the monetary policy becomes less effective and fiscal authorities satisfy the inter-temporal budget constraints through the excess money creation and in the process lead to inflation. While the monetarists ascribe the tag of the monetary phenomenon to inflation, Fisher and easterly (1990) regarded the inflationary tendencies as being always a fiscal phenomenon. In Reality, fiscal authorities have often preferred seigniorage to finance the fiscal imbalances and thereby triggered the inflationary pressures.
There is yet another recent theoretical premise arguing for the nature of the relationship between fiscal deficits and inflation, namely the fiscal theory of price level (FTPL) 4 . According to FTPL, the price level in an economy is not determined individually by monetary authorities alone, but a complementary approach of both monetary and fiscal policies is operative. When the fiscal authorities make an adjustment to the present value of its future surpluses, the price level will rise to lower the real value of debt 5 . Minford and Peel (2002) therefore rightly asserted that price level and fiscal policy are linked through the present value of the corresponding budget constraint. Moreover, The Keynesians also provide yet another channel for a direct association between fiscal deficits and inflation like those of Elmendorf and Mankiw (1999) 6 through aggregate demand augmentation.
It is important to note that the association between deficits and inflation is a dynamic one (Sergent and Wallace (1981)). In a fiscal dominance regime, fiscal deficits provide an estimate of future and not the current money creation (seigniorage) required for their financing and hence do not lead to current inflation. This is due to the fact that borrowing enables fiscal authorities to allocate the seigniorage intertemporally and refute the existence of any contemporaneous association. In addition, the short-run association between the two variables can be very multiplex (Dornbusch et al. 1990;Calvo and Vegh 1999), can involve a possible feedback of inflation on fiscal deficits (Catao and Terrones 2005) and hence its direction and strength may not be accommodative to theoretical analogies. Therefore the relationship between fiscal deficits and inflation would be analyzed from long-term perspective.
With a view to examine the deficit-inflation nexus heuristically, the study adopts a broader analytical framework to take cognizance of other important determinants of inflation as well. So far as the monetarists are concerned, inflation is determined positively by money supply, negatively by interest rate 7 and positively by the exchange rate. To take account of structural factors, we include real GDP growth rate to act as a surrogate for output fluctuations in the economy. The increasing integration of Indian economy with the rest of world and increasing dependence on oil imports makes it imperative to include the oil prices 8 and exchange rate fluctuations into the domain of empirical analysis. Lastly, trade-openness is also included in the inflation determinants equation so as to test the validity of Romer (1993)  INF is expressed as the percentage annual variation in Wholesale Price Index 9 (WPI). GFD is expressed as a percentage of GDP and following Catao and Terrones (2005) and Lin and Chu (2012), GFD is also scaled by narrow money (NM) for robustness purposes. GDPFC is the annual change in gross domestic product at constant prices. NM is represented by the narrow money measure and percentage annual growth rate of NM is represented by NMG. TO is measured by the sum of exports and imports both expressed as a percentage of GDP. Average of three Oil prices measures 10 in the foreign currency is first converted into rupee terms by multiplying the nominal exchange rate (EXR) of India with the respective oil price figures. Finally, OPI is calculated as the percentage annual variation in oil prices expressed in local currency. The inclusion of OPI in the analysis will portray the effect of oil price dynamism and exchange rate movements simultaneously.

Causality examination 4.2.1. Time-Domain
To examine the Time domain causality analysis between fiscal deficits and inflation, the study employs the well-known Toda-Yamamoto (1995) test, henceforth (TY) test. In the usual procedure of conventional Granger causality test, the lagged coefficients obtained through underlying VAR model are set equal to zero according to Wald's principle. However, Lutkepohl (2004) cautions of nonstandard limiting distributions of Wald's test statistic due to the co-integration properties of VAR model and these nonstandard asymptotic properties follow from the singularity of asymptotic distributions. To do away with the singularity nuisance, the TY test, supplemented the original VAR model with the maximum order of integration of variables. In addition to this advantage, the test performs better in case the variables are integrated and possibility cointegrated and the data is used in levels rather than in first differences 11 .
The TY test is performed using the specifications 1 and 2. It is to be noted that the standard Granger causality involves an estimation of VAR (k) model wherein k is the optimal lag length decided by various lag selection criteria's, however, in TY procedure, VAR (k + d max) model is estimated. Here d max is the maximum order of integration suspected in the process. If we set m=n=p and d as the maximum order of integration we proceed as: M and N constitute the set of variables to be examined for analysis. Here zero restrictions are put to first p parameters in order to test the null of no causality against an alternative one where the causality is supposed to exist. The test statistic usually referred as modified Wald (MWALD) follows a Chi-square distribution with p degrees of freedom and supposed to be independent of the number of unit roots and cointegration relations.

Frequency Domain
With a view to distinguishing between short and long-run causality, we resorted to Frequency Domain analysis. Statistically, frequency domain (FD) refers to a domain for the examination of mathematical functions or signals at various frequencies instead of time, wherein a given stationary process is decomposed into a weighted sum of sinusoidal components with a certain frequency (Ω). Though the nature of the definition of causality remains same for both Time and Frequency Domains, the framework of examination is different. Change of a signal over time is represented by a time domain graph, whereas the magnitude of signal a within each frequency band over a range of frequencies is connoted by FD graph. More simply time denotes the happening of a variation and frequency measures the strength of that variation. Though there are many approaches 12 available in the literature to conduct the Granger causality in frequency domain analysis we employed the recently developed framework of Breitung and Candelon (2006), hereafter (BC). This approach has the advantage of being applicable to either a stationary set of variables or integrated but not cointegrated (data used in first differences) or both integrated and cointegrated (data is used in levels). In addition, FD analysis eliminates seasonal variations in case the data series used for analysis is short and the methodology accounts for non-linearities and causality cycles i.e. causality analysis at low and high frequencies. Breitung and Candelon (2006) test between the two variables M and N can be performed through a VAR derived framework as 13 : Let = [ , ] be a two dimensional vector of time series obtained at t= 1…., T with a finiteorder VAR representation given by: Where Ɵ( ) = 1 − Ɵ 1 − ⋯ − Ɵ is a 2*2 lag polynomial with = − . is assumed to be a white noise process with ( ) = 0 ( 1 , 1 ′ ) = and is positive definite. Let H be the lower triangular matrix of the Cholesky decomposition H'H = −1 , such that E (∈ ∈ ′ ) = ∈ = .
The causality measure advocated by Geweke (1982) is defined as: If | 11 ( − )| 2 = 0, then there is absence of causality from N to M at frequency Ω. In case we have the elements of as integrated and possibly cointegrated, then frequency domain causality measure can be represented through an orthogonalized MA specification: 13 For a detailed account of test refer to Breitung and Candelon (2006).
Here ′ ( ) = ′ ( ) −1 . It may be noted that in a two-variable co-integrated system ′ ′ (1) = 0, is a cointegration vector and ′ is a stationary process (Engle and Granger;1987). Here again the associated causality measure is given by: We test the null of ⟶ (Ω) = 0 to check whether N causes M or not at any frequency Ω.
Breitung and Candelon (2006) provided a modified frequency domain causality test by using the following reformulated VAR specification.
The null hypothesis used in Geweke (1982), → (Ω) = 0, has been reformulated by BC into, The F statistic related to Eq. 12 follows F (2, T-2p) for Ω ≻ (0, ). It is to be noted that the causality between the two variables at the low frequency denotes the long-run causality and the short-run causality is represented at high frequency. If the variables are cointegrated then causality at zero frequency connotes long-run causality and in case of stationary variables there exists no such thing like long-run causality, instead the low frequency causality implies the explanatory variable is able to predict the low frequency component of dependent variable one period ahead.

Asymmetric cointegration
Primarily the study examines the existence of a long-run cointegration relationship between fiscal deficits and inflation in the economy. There are a number of linear tests available in the literature to check whether the variables of interest have any long-run association or not. The limitation of these linear tests is that they unrealistically assume a symmetrical relationship among the variables and ignore the possibility of any asymmetry in the nature of the relationship. The scholars like Shin, Yu and Greenwood-Nimmo (2014) cautioned about the misleading repercussions of assuming explicitly a linear association among variables and therefore suggested to take account of possible asymmetries for an exhaustive evaluation 14 .
Doing away with linearities and taking cognizance of possible asymmetries, we applied a recently developed asymmetric ARDL model by Shin, Yu and Greenwood-Nimmo (2014) for empirical analysis of long-run and short-run asymmetries among variables of interest. It provides a framework wherein a given time series is parted out into its positive and negative sum components ( + − ) and asymmetric long period relationship is combined with an asymmetric error correction. The basic version of the model involves the following specification: Here is a k × 1 vector of segregated explanatory variables and + and − are the associated long-run asymmetric coefficients. The set of explanatory variables is decomposed as: = 0 + + + − and the partial sum decompositions of positive and negative components ( + − ) are derived as: Here Δ represent the difference between successive values of the variable N. The short run asymmetric error correction model is depicted by: The asymmetric cointegration among the variables is tested in terms of a null of = + = − = 0, using the non-standard bounds based F statistic (Pesaran, Shin and smith 2001). This approach is applicable irrespective of whether the variables are integrated or stationary or a combination of both. From equation 2, we can check for following further possibilities: (i) = + = − representing long-run symmetry (ii)∑ , representing short-run symmetry or (iii) a combination of both short and long run symmetry 15 . The Wald's test statistic is used to decide about the presence or absence of above restrictions. Finally the graphical illustration of short run disequilibrium to new long run cointegrated equilibrium of the system in the non-linear framework is provided through cumulative dynamic multipliers.
(linear) cointegration is a special case of hidden cointegration and hidden cointegration is a special case of nonlinear cointegration. 15 In this case the non-linear ARDL model reduces to the standard symmetric ARDL model given by Hashem and Shin (1998). Here again the explanatory variable is decomposed into its oppositely signed components around a zero threshold value to portray the behavior of dependent variable to these components.

5.1.Causality analysis
We start with the examination of integration properties of the variables to be used in the analysis by applying the well-known Augmented Dickey-Fuller (ADF) test and Philips-Perron test. To supplement the result outcomes of these two tests, we also incorporated the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test. The test results reported a mixture of stationary and non-stationary variables. INF, CMR, GDPFC, and OPI are found I(0) and GFD, GFDD and TO are found to be I(1) 16 .
Prior to the causality evaluation, we first check for the existence of a long-run association between the variables of prime interest i.e. INF & GFD and INF & GFDD. Since we have a mixture of I(0) and I(1) variables, we applied the autoregressive distributed lag model or Bounds F-test as given by Pesaran &Shin (1998) and Pesaran, Shin and Smith (2001). As reported in panel A of Table 1, the null of no cointegration is rejected between inflation (INF) and Gross fiscal deficit (GFD) expressed as a percentage of GDP. Following Catao and Terrones (2005) and Lin and Chu (2013), the study has also used fiscal deficit (GFDD) expressed as a percentage of narrow money for the robustness purposes. The results are akin to those reported in the first case. With the confirmation of the long-run association between the two variables, causality analysis in a time domain framework is examined through TY test. The lower panel of Table 1 clearly provides an indication that fiscal deficits granger cause inflation in India but feedback causality is absent. The presence of unidirectional causality and long-run cointegration relationship highlights the inflationary influence of deficits in India. The outcome of this result is an indication of relative dominance of fiscal policy in India and the existence of a fiscal theory of price level (FTPL). In a fiscal dominance regime, the regulation of money supply by the monetary policy becomes less effective and fiscal authorities satisfy the intertemporal budget constraints through the excess money creation and in the process lead to inflation. In FTPL, fiscal authorities are permitted to choose the surplus or deficit figures haphazardly not necessarily conducive for fiscal solvency. Thus due to the exogenous character of fiscal actions, endogenous movement of the price level is required to achieve fiscal solvency. The fiscal policy thus becomes a leader and monetary policy a follower, controls only the timing of inflation and with the result, fiscal deficits tend to be inflationary.
The four parts of Figure 1 portray the causality analysis in a frequency domain framework using BC test. The part "a" of the figure shows that fiscal deficits cause inflation only at lower frequencies or higher time periods. At the higher frequencies (short-run), deficits are not found to cause the inflation in India. Part "b" again provides an illustration of the absence of feedback causality from inflation to fiscal deficits in India at all frequencies. Thus BC test supports the theoretical argument that fiscal deficits need not be inflationary in the short-run since the Govt can temporarily resort to borrowings for the deficit financing instead of excess money creation in shortrun. The outcome of this result also validates the intrinsically dynamic nature of the relationship between fiscal deficits and inflation. The parts "c" and "d" of the figure provides the results for robustness. The two parts again support the results reported earlier.

5.2.Asymmetric cointegration analysis
The cointegration relationship between fiscal deficits and inflation has also been analyzed in an asymmetric framework with a view to providing some insights about the possible asymmetry if any exists between the two variables. To serve the purpose the study applies NARDL model developed by Shin, Yu and Greenwood-Nimmo (2014). We include INF, GFD, CMR, GDPFC, TO and OPI variables. Since we have a mixture of I(0) and I(1) variables and none of them is

Figure1: Frequency domain causality (BREITUNG-CANDELON test)
I(2), the application of NARDL is justified 17 . In addition, the adopted methodology would also take note of dynamic nature of the relationship between deficits and inflation, since the specification permits the lags of both dependent and independent variables to influence the dependent variable and also allows for intrinsic dynamic adjustment 18 .
In this case, as well, the null of no cointegration is again rejected like in the case of linear Bounds F-test, since the F-pss as reported at the bottom part of Table 2, is found to be statistically significant. The presence of a long-run cointegration relationship in an asymmetric framework provides an indication of the inflationary role of fiscal deficits. We followed a general to a specific approach for the estimation of asymmetric ARDL error correction model 19 . We started with p=q=2, and zero restrictions are assigned to most of the insignificant lags to ensure precision and avoidance of noise into the dynamic multipliers. Absence of serial correlation is accepted in case of the Portmanteau serial correlation test 2 and presence of normality is accepted in the Jarque-Bera test of normality 2 . Therefore the stability conditions of estimated model are fulfilled. With the detection of long-run association, the study proceeds to examine whether it is symmetrical or some asymmetry is involved. Wald's test with a null of symmetrical association between the variables is tested against an alternative of asymmetrical one. The long-run (WLR) and short-run (WSR) test statistics are reported in panel B of Table 2. The results document the presence of an  asymmetrical long-run association between INF & GFD, INF & CMR, INF & GDPFC and INF &  TO; however, the null of symmetrical association cannot be rejected between INF and OPI. The short-run asymmetry is also reported among the same pairs of variables and the null of asymmetric impact cannot be rejected again in case of oil price inflation as the WSR is insignificant at conventional 5% significance level.
The long-run coefficients of the inhabited relationship of various variables with the inflation are shown in panel A of Table 2. In case of fiscal deficits, + = 4.710 and − = −0.071. The establishment of a long-run direct association between the two variables provides an empirical support to the projections of Khundrakpam and Pattanaik (2010). Surge in money supply in the economy (due to increased fiscal deficits and capital inflows) and the narrowing down of negative demand gaps in the economy provide a manifestation of inflationary role of fiscal deficits in India. The signs of positive and negative coefficients are according to theory and both are statistically significant. However, increases in fiscal deficits are found to be more inflationary and the decreases in fiscal deficits are found to affect the inflation with a lower magnitude. The possible asymmetry of fiscal deficits on inflation can be explained through the existence of liquidity constraints and the downward price stickiness. Due to the existence of liquidity constraints as reflected through less developed credit markets, any increase in fiscal deficits would lead to an exacerbated increase in aggregate demand because of providing additional purchasing power to the individuals with limited liquidity hitherto and also enable individuals without constraints feel wealthier. Hence, impact on inflation would be relatively higher. In case the deficits are reduced, people find it difficult to lower the consumption levels (Ratchet effect) drastically, leading only to a marginal decline in demand conditions and hence a lower effect on inflation is observed. The lower impact of reduced fiscal deficits on inflation can also be explained through downward price stickiness. Producers are usually hesitant to price and wage reductions in order to avoid the workeremploy conflicts, secure the worker morale and secure some degree of price setting power. Thus the effect of contractionary fiscal action in-terms of a decline in deficit spending has a lower effect on inflation.
Coming to the impact of monetary policy shocks as surrogated through call money rate of interest, we found contractionary policy stance to be more effective than the expansionary policy stance, signifying the asymmetric influence of monetary policy on the inflation of India. The observed asymmetry is a reflection of metaphor_ a stronger influence of contractionary shock is similar to pulling on a string and a relatively lower impact of expansionary shock is akin to pushing on a string 20 . The reason for this asymmetry can be ascribed to the behavior of demand conditions under various monetary policy stances. An increase in interest rate by RBI leads to an upsurge in lending rates of commercial banks due to shifting of increased costs to the borrowers. The high lending rates could, in turn, increase the chances of borrowers default and as a result, banks become more risk-averse and very choosy in the credit supply. This leads to a lower level of investment, a reduction in household consumption i.e. a reduction in demand conditions and hence a fall in the price level. The substantial reduction of inflation due to interest rate hikes can also be explicated through the money supply channel. An increase in interest rate by the central bank leads to a rise in prime lending rate, a decline in credit supply, a fall in money supply via money multiplier process and finally to a lower level of the price level. On the other hand, a decrease in the interest rate during the retarded economic conditions will not necessarily lead to borrowing and spending augmentation of all economic agents in the economy, the effect of expansionary policy stance will, therefore, be relatively lower 21 .
The impact of output growth and decline as represented by the positive and negative sum components of GDPFC is well according to the theoretical contours, but however, an asymmetry is reported. A negative growth in output is found to increase the inflation relatively by a higher magnitude than the positive growth is found to reduce it. A decline in the output indicates the presence of supply constraints and given the demand conditions (if not increasing) the impact on price level will be higher. On the contrary, an increase in output growth cannot decrease the prices drastically due to the presence of producer's price-setting power to some extent. Thus in a supply constrained economy, downward price rigidity leads to the asymmetric impact of output growth and output decline on inflation.
As regard to the trade-openness, although an asymmetry is reported the signs refute the validation of Romer (1993) hypothesis in case of India. Specifically, the estimated long-run positive coefficient of TO + is -0.389 and that of TOis -0.723. The former is statistically insignificant and the latter is significant. The insignificance of TO + may be due to its ex-post measurement of openness only and lacks the ex-ante measurement. The negative component is significant, however, and the sign establishes a positive association between inflation and openness. The direct link in case of India is in line with inflationary impact of outward -orientation for developing countries (Evans 2007;Jalil et al. 2014). The asymmetries observed above again highlight the presence of price stickiness in the inflationary phenomenon of the economy.
Finally, the impact of oil price inflation is although theoretically correct, but both the positive and negative coefficients are weak and statistically insignificant. The possible explanation for such insignificance at the segregated asymmetric level is that the global oil prices have been converted to domestic oil prices by multiplying the former with the nominal exchange rate of the country concerned. The movements of the two variables, global oil prices, and exchange rates may not always be reinforcing but some counter movements are also possible. There may be a fall in global oil prices, but due to the increased demand from the country at a lower global price, its exchange rate depreciates and the initial effect of declining oil prices will now get negated through increasing exchange rates and thus the overall influence may be insignificant. In case of India, the depreciation of rupee more than offsets the favorable effect of the marginal decline in global commodity prices on domestic inflation (RBI 2013).
The results documented above very vehemently justified the application of non-linear ARDL into the empirical exercise. Thus instead of assuming unrealistically the linear nature of model specification and to do away with inappropriate policy conclusions we proceed with a well behaved and theoretically supported non-linear specification to take cognizance of dynamic nature of the relationship between fiscal deficits and inflation on one hand and that of observed asymmetries on the other. The graphical examination of dynamic effects of independent variables on the inflation can be further portrayed through dynamic multipliers, as shown in Figure 2. The graphs plot the dynamic effects of positive and negative changes in fiscal deficits, interest rates, output growth, trade openness and oil price inflation on the inflation of India. In case of fiscal deficits, asymmetry is stronger from the positive change and asymmetry persistence is observed even in long-run. As related to interest rate shocks, contractionary policy stance is more influential than the expansionary stance. Similarly, expansion in output growth declines inflation relatively by a lower magnitude than the increase in inflation is caused by output decline. Finally, in case of oil price inflation and trade openness, we found the same phenomenon as reported in Table 2. However, the coefficients associated with positive change in trade openness and with both positive and negative changes in case of oil price inflation are statistically insignificant. The robustness of results is provided by using fiscal deficits as a percentage of narrow money in an economy as the key variable of analysis. Table 3 and Figure 3 reflect a mirror image of table 1 in terms of asymmetric tests in short-run and long-run, the sign of various coefficients, the relative strength of positive and negative changes in associated variables and the corresponding statistical significance 22 .  Table 1 we found the additional insignificance of negative component of fiscal deficits and absence of long-run asymmetry in case of output growth.

Conclusion:
Higher inflation has always been considered as a growth retarding factor and a means of reducing the welfare standards of common masses. Therefore, maintaining a stable price level featured by low inflation rate has remained a prioritized objective of macroeconomic management of all the economies including India. Among the many factors fuelling up the inflationary tendencies in an economy like monetary shocks, structural shocks, demand shocks, external shocks and demographic changes, the issue of inflation has also been found related to fiscal policy decisions of Govt. The primary purpose of the study is to evaluate the inflationary tendencies in India particularly from the fiscal point of view. We examined the causality between fiscal deficits and inflation in a time domain and frequency domain framework. We found a unidirectional causality running from fiscal deficits to inflation in case of time domain analysis and no feedback causality is reported. However, in case of frequency domain design, causality from fiscal deficits to inflation is found at low frequencies only, i.e. no short-run causality is established and hence dynamic nature of the relationship between the two variables is justified. Using NARDL model, we examined the nature of association in an asymmetric framework. The results document the existence of an asymmetric long-run association between fiscal deficits and inflation. The outcome of this result is an indication of relative dominance of fiscal policy in India and the validation of fiscal theory of price level (FTPL). However, the expansionary fiscal stance is found to be more inflationary and the decreases in fiscal deficits are found to affect the inflation with a lower magnitude. The possible asymmetry of fiscal deficits on inflation can be explained through the existence of liquidity constraints and the downward price stickiness.
The other control variables used in the empirical exercise also reported the theoretically plausible results. Contractionary monetary policy stance is to be more effective than the expansionary policy stance, signifying the asymmetric influence of monetary policy on the inflation of India. Similarly, in a supply-constrained economy with downward price rigidity, we found an asymmetric impact of output growth and output decline on inflation. As regard to the trade-openness, although an asymmetry is reported the signs refute the validation of Romer (1993) hypothesis in case of India. Finally, the impact of oil price inflation on the inflationary pressures of India is well according to theory but the coefficients are devoid of statistical significance.