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Oil Price Shock, Pass-through Policy and its Impact on India

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  • Bhanumurthy, N. R.

    ()
    (National Institute of Public Finance and Policy)

  • Das, Surajit

    ()
    (National Institute of Public Finance and Policy)

  • Bose, Sukanya

    ()
    (National Institute of Public Finance and Policy)

Abstract

This paper analyses the impact of transmission of international oil prices and domestic oil price pass-through policy on major macroeconomic variables in India with the help of a macroeconomic policy simulation model. Three major channels of transmission viz. import channel, price channel and fiscal channel are explored with the help of a comparative static macroeconomic general equilibrium framework. The policy option of deregulation of domestic oil prices in the scenario of occurrence of a one-time shock in international oil prices as well as no oil price shock situation analysed through its impact on growth, inflation, fiscal balances and external balances during the 12th Plan period of 2012-13 to 2016-17. The simulation results indicate that the deregulation policy as such would have adverse impact on the growth as well as on the inflation. But if this policy is complemented with the policy of switching of subsidy bill to capital expenditure might result in positive growth effects only in the medium term. Given, the current pass-through policy, one-time oil shock has more intense adverse impact on growth and inflation in the year of shock while it mitigates slowly over time. The model shows that with the oil shock and with current partial pass-through regime, a 10 per cent rise in oil prices result in a 0.6 per cent fall in growth while in the full pass-through situation, it can reduce the growth by 0.9 per cent. Overall, the paper argues that the pass-through has diferential impact on growth and inflation over the 12th Plan period. Hence, the policy of oil price deregulation must be carefully weighed and prioritized.

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Bibliographic Info

Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number 12/99.

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Length: 54
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:npf:wpaper:12/99

Note: Working Paper 99, 2012
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Web page: http://www.nipfp.org.in

Related research

Keywords: Policy simulation ; International price shock ; Transmission channels ; Macroeconomic modelling ; Growth ; Inflation ; Current account deficit ; Subsidies ; Fiscal deficit ; India;

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References

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  1. International Monetary Fund, 2007. "Oil Shocks and External Balances," IMF Working Papers 07/110, International Monetary Fund.
  2. Sudipto Mundle & N.R. Bhanumurthy & Surajit Das, 2010. "Fiscal Consolidation with High Growth A Policy Simulation Model for India," Working Papers id:2825, eSocialSciences.
  3. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  4. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
  5. Surender Kumar, 2009. "The Macroeconomic Effects of Oil Price Shocks: Empirical Evidence for India," Economics Bulletin, AccessEcon, vol. 29(1), pages 15-37.
  6. Hamilton, James D & Herrera, Ana Maria, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 265-86, April.
  7. Renee Fry & Callum Jones & Christopher Kent, 2010. "Inflation in an Era of Relative Pirce Shocks," CAMA Working Papers 2010-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  8. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
  9. Almukhtar S. Al-Abri, 2013. "Oil price shocks and macroeconomic responses: does the exchange rate regime matter?," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 37(1), pages 1-19, 03.
  10. Renee Fry & Callum Jones & Christopher Kent, 2010. "Inflation in an Era of Relative Pirce Shocks," CAMA Working Papers 2010-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  11. Bernanke, Ben S & Gertler, Mark & Watson, Mark W, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 287-91, April.
  12. Anton Nakov & Andrea Pescatori, 2010. "Monetary Policy Trade-Offs with a Dominant Oil Producer," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 1-32, 02.
  13. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1.
  14. Keane, Michael P & Prasad, Eswar S, 1996. "The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 389-400, August.
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Citations

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Cited by:
  1. Anand, Mukesh Kumar, 2012. "Diesel Pricing in India: Entangled in Policy Maze," Working Papers 12/108, National Institute of Public Finance and Policy.
  2. Rahul Anand & David Coady & Adil Mohommad & Vimal V Thakoor & James P Walsh, 2013. "The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India," IMF Working Papers 13/128, International Monetary Fund.
  3. Anand, Mukesh, 2014. "Direct and Indirect Use of Fossil Fuels in Farming: Cost of Fuel-price Rise for Indian Agriculture," Working Papers 14/132, National Institute of Public Finance and Policy.
  4. Bose, Sukanya & Bhanumurthy, N.R., 2013. "Fiscal Multipliers for India," Working Papers 13/125, National Institute of Public Finance and Policy.

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