Fiscal Dominance, Structural Rigidities and the Political Economy of Inflation in India: From Nehruvian Planning to the Monetary Policy Framework

Abstract

India’s persistent inflation reflects fiscal dominance, structurally distorted agricultural markets and the primacy of distributional politics over price stability. Using ARDL bounds testing, Toda–Yamamoto Granger precedence, Bai-Perron structural break analysis (unconditional and conditional) and GARCH(1,1) with break dummies on both the conditional mean and variance, applied to quarterly data spanning 1955 Q1–2024 Q4, the paper identifies three structural determinants of inflation persistence: fiscal deficits operating through channels distinct from monetisation; minimum support price policies transmitting cost-push shocks via the high food share in the CPI; and inertial expectations. The 2014 Q3 transition coinciding with inflation-targeting adoption constitutes a statistically identifiable regime shift in both the level and conditional volatility of inflation. Framework durability depends on continued fiscal consolidation and agricultural reform.