Relationship between GDP & Inflation in India and China

Abstract

This paper explores the relation between inflation and Gross Domestic Product (GDP) in India and China during the time period from 1991 to 2021. The study analyzes time-series data from the World Development Indicators database and employs Autoregressive distributed Lag model (ARDL) and error correction models to examine the short-term and long-term dynamics. The research uses the Augmented Dickey-Fuller (ADF), Phillips-Perron (PP), and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) tests to check for stationarity in the variables (including GDP, GCF, Inflation, Male and Female labor force participation, and FDI). Bounds F and T tests are used to check for cointegration, and a Granger causality test is conducted to identify any causal relationships between the variables. The findings reveal that there is a positive short-term relationship between GDP and inflation in India, whereas in China, there is a positive short-term and negative long-term relationship between GDP and Inflation. Additionally, the study reveals that there is no causal relationship between GDP and inflation in India, while in China, the causality runs unidirectionally from GDP to inflation. Policymakers in India may need to adopt measures that balance the need for economic expansion with the need to maintain inflation within a manageable range to ensure sustainable economic growth. In China policymakers may need to focus on long-term strategies to manage inflation and maintain sustainable economic growth at the same time prioritizing strategies that promote economic growth as a means of managing inflation.. Key Word: Inflation; GDP; India; China; ARDL