Fiscal dominance, growth and inflation

Because of fiscal dominance, growth itself may be necessary for monetary independence and price stability

The Union Budget for 2022-23 has provoked considerable commentary, on topics ranging wide and far. But surprisingly little attention has been paid to the actual state of the public finances. This is a pity, since the fiscal position is worrisome, with important implications for growth and inflation. Fiscal dominance — monetary policy influenced by the public finances — is back, with a vengeance.

The government expects the Centre’s deficit to amount to nearly 7 per cent of gross domestic product (GDP) in 2021-22, with the consolidated debt amounting to an elevated 85 per cent of GDP. In part, these levels are