Abstract Both Keynesians and monetarists believe that inflation is caused by an increase in aggregate demand, which is caused by an increase in the money supply. The most signifcant impact of inflation is to distort relative prices, and savings, investment, and the fscal balance. Though inflation is generally associated negatively with economic growth, there may also possibly be a threshold or positive effect of price rise on industrial growth, and thereby, on the economy. This paper examines the long- and short-run causal relationship between inflation, money supply, and industrial output in India over the period 1981 to 2020, applying the vector error correction mechanism (VECM) approach. The unit root tests show that the index of industrial production, reserve money, and consumer price index are stationary at the second difference, and the Johansen cointegration test reveals that the variables are cointegrated. The coeffcient of the error correction term in the VECM estimates is negative, signifcantly in the inflation equation, and insignifcantly in the output and money supply equations. The VECM results reveal short-run causality between money supply and industrial production, showing disequilibrium in the short-run relationship between industrial production, inflation, and money supply, and quick adjustment towards the long-run equilibrium. The speed of adjustment in the inflation equation is 24 per cent. Therefore, about 24 per cent of the short-run deviation, i.e. disequilibrium, in the inflation-growth relationship is adjusted every year. Keywords: Industrial Production, Money Supply, Inflation, Causality, VECM Estimation The Causal Relationship between Money Supply, Infation, and Industrial Production in India: Vector Error Correction Estimation T. Lakshmanasamy* Introducton Inflation is a sustained increase in the general price level of goods and services in an economy over a period of * Formerly Professor, Department of Econometrics, University of Madras, Chennai, Tamil Nadu, India. Email: tlsamy@yahoo.co.in International Journal of Financial Management 11 (3) 2021, 34-43 http://publishingindia.com/ijfm/ time. When the price level rises, each unit of currency buys fewer goods and services, reflecting a reduction in the purchasing power per unit of money. That is, there is a loss of real value in the medium of exchange and unit of account within the economy. The inflation rate is the chief measure of price inflation, which depicts the annualised percentage change in a general price index, generally the consumer price index, over time. Low or moderate inflation is mostly attributed to fluctuations in real demand for goods and services or changes in available supplies, such as during scarcities. However, the consensus view is that a long sustained period of inflation or hyper-inflation is caused by the money supply growing faster than the rate of economic growth. However, growth in money supply need not necessarily cause inflation. Both Keynesians and monetarists believe that inflation is caused by an increase in aggregate demand, which in turn is caused by an increase in the supply of money. The higher the growth rate of the nominal money supply, the higher the rate of inflation. An increase in the disposable income of people raises their demand for goods and services, and thereby the inflation rate. Disposable income may increase with the rise in national income or reduction in taxes or reduction in the savings of the people. An increase in consumer spending raises the demand for goods due to conspicuous consumption, demonstration effect, and the easy availability of credit, hire-purchase, and instalment facilities. Inflation is also caused by government or public expenditure. Increasing government activities raises government expenditure, which in turn raises aggregate demand for goods and services, thus eventually causing inflation. A cheap monetary policy, credit expansion, defcit fnancing, repayment of public debt, and increased