IMPACT OF UNEMPLOYMENT AND INFLATION ON THE ECONOMIC GROWTH OF INDIA

Abstract

The effects of unemployment and inflation on the output growth of India over the period 1990 -2021 have been examined in this paper. The method of Panel Unit Root test; Panel Cointegration test; Mean Group and Pooled Mean group test; were applied in this study. The study provides evidence of having up to four co-integrating relationships among the variables applied and has not suffered from serial correlation, heteroscedasticity, and multicollinearity to carry out the stability of the estimated coefficients using the cumovulative sum (CUSUM) of recursive residuals. The logarithm of capital stock and investment in human capital (HUCAP) have a significantly stimulating impact on the logarithm of output in India in the long run. The result shows that a one percent increase in capital stock is liable to increase the real gross domestic by 0.154% in the long run, while a unit increase in human capital investment is susceptible to increasing real GDP by 0.002% in the long run, assuming all other factors are held constant. The inflation rate, however, has a depressing impact on real GDP in India. A 1% increase in inflation is liable to reduce real GDP by 0.004% in the long run. The results have also shown that unemployment (UNEMPL) has no significant impact on the logarithm of real GDP in the long run as it has a greater significance level. The short-run results have shown that if the log real GDP deviates from its long-run, it recovers over 32% in one year. Results indicate that inflation significantly depresses economic performance in India because of uncertainty and reduces investment, employment, and consequently output. Unemployment has not significantly impacted real GDP in India, the reasons being the use of a log of real GDP, the nature of the regression model applied, and controlling for the possible impact of human capital and physical capital. Investment in physical capital and human capital has significantly promoted economic performance in India because investment in human capital improves the productivity of the labor forces and hence increases output and investment in physical capital increases the amount of capital per unit of labor and these have the potency of increasing productivity per worker. The overall effect is an increase in output and therefore economic performance. Unemployment is caused by various reasons but the main causes are the high growth rate of the population; the lack of job opportunities; and the inefficiencies of the public sector. The Government of India may focus on creating a proper environment for the private sector to create jobs and increase job opportunities; and modernization of the agriculture sector through its strategies and resources that include attracting foreign investors.