Macroeconomic Dynamics in India: Exploring the Interplay between Growth, Inflation and Unemployment

Abstract

This study explores the intricate relationships among economic growth, inflation, and unemployment in the Indian economy using time series data from 1993 to 2021, sourced from the Reserve Bank of India and the World Bank. Employing econometric techniques such as cointegration analysis, Vector Error Correction Models (VECM), and Vector Autoregression (VAR), the paper investigates both long-run and short-run causal linkages. The results reveal a statistically significant long-run relationship between unemployment and inflation, where declining unemployment tends to increase inflation, consistent with the Phillips Curve framework. However, no short-run causality is observed between these variables. The study also finds a long-run inverse relationship between unemployment and GDP growth, in support of Okun’s Law, while short-run effects remain statistically insignificant. In contrast, there is no evidence of either a short-run or long-run relationship between inflation and GDP growth, challenging the conventional notion of an inflation–growth trade-off. These empirical insights provide a nuanced understanding of India’s macroeconomic dynamics and offer relevant policy implications for sustaining growth while managing inflation and employment in an emerging economy.