Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Impact of Oil Prices on the Indian Economy
A. Aparna
Impact of Oil Prices on the Indian Economy
ISSN: 0971-1023 | NMIMS Management Review
Double Issue: Volume XXIII October-November 2013
University Day Special Issue January 2014
Abstract
Crude oil prices play a very significant role on the
economy of any country. India's growth story hovers
around the import of oil as India imports 70% of its
crude requirements. In this paper, an attempt has
been made to study the impact of crude oil price on the
Indian economy by considering Gross Domestic
Product (GDP), Index of Industrial Production (IIP) and
Wholesale Price Index (WPI) as the relevant variables.
Vector Auto Regression (VAR) has been used to analyse
the objective since a direct causal relationship could
not be established.
Keywords: Gross Domestic Product (GDP), Index of
Industrial Production (IIP) and Wholesale Price Index
(WPI), Vector Auto Regression (VAR).
RESEARCH NOTE
141
Introduction
The recent rise in the prices of crude oil has drawn
everyone’s attention towards the crucial role that oil
plays in the economy of any nation. Crude oil is one of
the most necessitated commodities in the world and
India imports around 100 million tons of crude oil and
other petroleum products. This in turn, results in
spending huge amounts of foreign exchange. The
increasing quantum of imports of petroleum products
has a significant impact on the Indian economy,
especially when crude oil prices are shooting up
globally. Crude oil not only serves as a source of energy
but also as a major raw material to various industries.
With no major discoveries in the recent years, the
increasing costs of production have pushed up crude
oil prices globally. Also, the high volatility in the prices
of oil breaching the $100/barrel mark and rising to a
high of $147/barrel could be attributed to the fact that
in the recent years, many index funds have taken
could be adversely affected by the increase in crude oil
price are usually characterized by high net imports of
oil per GDP. Traditionally, the non-oil producing
developing countries fall under this category. Against
this background, developed countries are more
economical in their usage of oil and therefore, see an
easing of this adverse effect of rise in crude oil prices.
This phenomena has led to many European developed
countries enjoying a significant inflow of oil money.
Today, we may find a negative impact of rise in crude oil
prices. A steep fall in the current accounts leads to
further worsening of the treasury budgets, which, in
turn, will further worsen the balance between savings
and investments. Also, reducing tax revenues and
other extraneous factors will further deteriorate the
treasury budgets. Due to the economic crisis in
Europe, where the treasury budgets have shaken,
there is a monumental imbalance between savings
and investments. These imbalances continue
Historically, there have been four oil shocks in the past
thirty years. In spite of this, low inflationary pressure
has been assisting the developed countries in
mitigating the risk associated with oil shocks. Contrary
to this, developing countries are affected more
because of the absence of advanced technology to
conserve oil.
Literature reveals that most researchers agree with the
fact that inflation has a recessionary effect on oil
prices. According to Bruno (1982), oil price shocks lead
to an increase in wages and prices, and decrease in real
output. The same conclusion was substantiated by
Hamilton (1983) using the Vector Auto regression
(VAR) technique. Burbidge and Harrison (1984) found
that the impact was different across different
countries in spite of the fact that all were developed
countries. Hooker (1996) on the other hand, found
that the causal relationship between oil prices and
macro-economic variables weakened post 1973 and
Strategically, oil plays a very significant role in the
economy of any country. Keeping this in view, an
attempt has been made in this paper to explore the
relationship between volatility in oil prices and its
impact on the Indian economy. This topic is pertinent
to the current situation when India imports almost
90% of its oil requirements. The objective of this paper
is to determine the relationship between increase in
oil price and the change in GDP, IIP and WPI.
Methodology: Oil impacts the economy through
various channels. This study restricts itself to analyzing
the direct impact of oil prices on the WPI and IIP, and
thereby on the GDP of the country. Quarterly data
from 1995 till 2008 has been considered for the study
which has been obtained from the CMIE database. The
variables that have been considered for the study are
as follows:
GDPX: Log normal change in Indian GDP (in Rs.)
