What Causes Inflation in India? A Cost-Push Alternative to Mainstream Explanations

Earlier this year, the Indian central bank formally adopted inflation targeting, which is a means of controlling inflation by influencing the demand for goods and services. Against this backdrop, this paper examines whether inflation in India is primarily caused by excess demand, or by the cost of producing goods and services. Accordingly, it categorizes the existing literature into demand-pull and cost-push categories, with the role of demand in the inflation process seen as the distinguishing feature between the two. Demand-pull approaches see a causal role for demand, while cost-push approaches see a secondary role for it. The prominent approaches under the demand-pull and cost-push categories are analysed. Both the demand-pull approaches, New Keynesian and monetarist, are found to be theoretically weak, and also do not perform well in empirical tests. The structuralist approach under the cost-pull category performs better on both theoretical and empirical fronts, particularly in the period following the global financial crisis of 2008-09. This inference points to the unsuitability of inflation targeting as a monetary strategy for the Indian central bank.