Does Inflation Slow Long-Run Growth in India?

This paper examines the long-run relationship between consumer price index industrialworkers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indianstates over the period 1989–2013, and use the cross-sectionally augmented distributed lag (CSDL)approach of Chudik et al. (2013) as well as the standard panel ARDL method forestimation—to account for cross-state heterogeneity and dependence, dynamics and feedbackeffects. Our findings suggest that, on average, there is a negative long-run relationship betweeninflation and economic growth in India. We also find statistically-significant inflation-growththreshold effects in the case of states with persistently-elevated inflation rates of above 5.5percent. This suggest the need for the Reserve Bank of India to balance the short-term growthinflationtrade-off, in light of the long-term negative effects on growth of persistently-highinflation.