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 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 based on the introduction of new welfare programs. We re-examine the relationship between government transfers and inflation by studying whether the recent implementation of India’s public workfare program, NREGA, had aggregate price effects. Using the phase-wise implementation design of the program, we confirm the absence of any association between higher program coverage and price inflation.