Fiscal Transfers and Inflation: Evidence from India

Controlling for monetary policy, government transfers are potentially inflationary. This, however, may not be true when the economy is demand constrained. Using a panel data of 17 Indian states over 30 years, we show that government transfers via
welfare programs do not lead to inflation. For identification, we use a narrative shock series of transfer spending that is based on the introduction of new welfare programs. We then look at a specific program, NREGA, which has been shown to increase rural wages, and show that its implementation did not increase inflation.