How Does Economic Growth React to Fiscal Deficit and Inflation? An ARDL Analysis of China and India

Abstract

The current analysis strived to unearth the impact of inflation and fiscal deficit on economic growth and conduct a comparative review between the world's two fastest-growing economies, China and India. The present empirical investigation exerted multivariate time series modeling, such as auto-regressive distributional lag (ARDL) model and Granger causality test for accomplishment of the data analysis. The empirical outcome revealed that there was an adverse impact of inflation and fiscal deficit on the economic growth of China. The coefficients of these two variables were negative as well as significant. As far as India is concerned, the cointegration result unearthed that the fiscal deficit positively impacted economic growth, while inflation hurt the same. The outcome of causality unveiled that there was no causality running from inflation as well as fiscal deficit to the economic growth in case of the Chinese economy. On the contrary, unidirectional causality was found from inflation and budgetary deficit towards the economic growth individually as well as jointly in the case of the Indian economy.