Vol 7 , Issue 2 , July - December 2020 | Pages: 17-33 | Research Paper
Published Online: November 27, 2020
( * ) denotes Corresponding author
The study empirically verifies the impact of fiscal deficit (FD) on macroeconomic variables like growth of Gross Domestic Product, inflation and private capital formation. The annual time series data for the period 1970 to 2018 have been taken. Long run relationship between variables has been verified by using the Johansen Co-integration techniques and autoregressive distributed lag (ARDL) bound test. Based on the existence of co-integrating relationship, VECM and VAR model have been used. From the empirical analysis it is observed that there is long-run equilibrium relationship between FD, inflation and growth of GDP. However, long-run co-efficients of fiscal deficit to GDP ratio are not statistically significant. In the short run, FD adversely affects growth of GDP, positively influences inflation rate and it does not crowd out private investment. Consolidation of government finances through efficient revenue mobilisation and limiting non-developmental spending will help keep FD under target and check the adverse effects of FD on the macroeconomic indicators.
Fiscal deficit; Capital formation; GDP; Inflation; Crowding out; Fiscal consolidation.