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

In: Market, Regulations and Finance

Author

Listed:
  • Surajit Das

    (Jawaharlal Nehru University)

  • Sukanya Bose

    (National Institute of Public Finance & Policy (NIPFP))

  • N. R. Bhanumurthy

    (National Institute of Public Finance & Policy (NIPFP))

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 of oil price shock viz. import channel, price channel, and fiscal channel are explored within a structural macroeconomic framework. The policy options of gradual 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 are analysed for their impact on growth, inflation, fiscal balances and external balances during the 12th Plan period of 2012–2013 to 2016–2017. The simulation results indicate that in the short run the deregulation policy 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 it might result in positive growth effects in the long run. Given, the current pass-through policy, a 10 % rise in oil prices result in a 0.6 % fall in growth while in the full pass-through situation, it can reduce the growth by 0.9 percentage point on an average. Overall, the paper demonstrates that the extent of pass-through has differential impact on growth and inflation over the 12th Plan period. Hence, the policy priority of oil price deregulation must be carefully weighed.

Suggested Citation

  • Surajit Das & Sukanya Bose & N. R. Bhanumurthy, 2014. "Oil Price Shock, Pass-Through Policy and its Impact on India," India Studies in Business and Economics, in: Ratan Khasnabis & Indrani Chakraborty (ed.), Market, Regulations and Finance, edition 127, chapter 13, pages 231-253, Springer.
    • Handle: RePEc:spr:isbchp:978-81-322-1795-4_13
    DOI: 10.1007/978-81-322-1795-4_13
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    Cited by:

    1. Ben Salem, Leila & Nouira, Ridha & Saafi, Sami & Rault, Christophe, 2024. "How do oil prices affect the GDP and its components? New evidence from a time-varying threshold model," Energy Policy, Elsevier, vol. 190(C).
    2. Anand, Mukesh Kumar, 2016. "Reforming fossil fuel prices in India: Dilemma of a developing economy," Energy Policy, Elsevier, vol. 92(C), pages 139-150.
    3. López-Villavicencio, Antonia & Pourroy, Marc, 2019. "Inflation target and (a)symmetries in the oil price pass-through to inflation," Energy Economics, Elsevier, vol. 80(C), pages 860-875.
    4. N. R. Bhanumurthy & Sukanya Bose & Parma Chakravartti, 2018. "Targeting Debt and Deficits in India: A Structural Macroeconometric Approach," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 87-119, December.
    5. Rahul Anand & Mr. David Coady & Mr. Adil Mohommad & Mr. Vimal V Thakoor & Mr. James P Walsh, 2013. "The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India," IMF Working Papers 2013/128, International Monetary Fund.
    6. William Godfred Cantah & Camara K Obeng & William G Brafu-Insaidoo, 2017. "Sources of oil price shocks and external balance in Ghana," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 5(4), pages 24-44, August.
    7. Ozgur, Onder & Aydin, Levent & Karagol, Erdal Tanas & Ozbugday, Fatih Cemil, 2021. "The fuel price pass-through in Turkey: The case study of motor fuel price subsidy system," Energy, Elsevier, vol. 226(C).
    8. Sukanya Bose & N.R. Bhanumurthy, 2015. "Fiscal Multipliers for India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 9(4), pages 379-401, November.
    9. Solaymani, Saeed, 2021. "Which government supports are beneficial for the transportation subsectors," Energy, Elsevier, vol. 235(C).
    10. David Coady & Rahul Anand & Adil Mohommad & Vimal Thakoor, 2015. "The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India," Working Papers id:6575, eSocialSciences.
    11. Bruna, Karel & Van Tran, Quang, 2023. "Asymmetric effects of oil price shocks on EUR/USD exchange rate and structural shock decomposition in a BVAR model with sign restriction," Energy Economics, Elsevier, vol. 128(C).
    12. Bhanumurthy, N.R. & Bose, Sukanya & Satija, Sakshi, 2019. "Fiscal Policy, Devolution and Indian Economy," Working Papers 19/287, National Institute of Public Finance and Policy.
    13. 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.
    14. Khalafalla Ahmed Mohamed Arabi & Suliman Zakaria Suliman Abdalla, 2013. "A Macroeconometric Model for the Sudan Economy: Empirical Evidence from Error Correction Framework 1956-2010," Research in World Economy, Research in World Economy, Sciedu Press, vol. 4(1), pages 95-108, March.
    15. Iqbal Thonse Hawaldar & T. M. Rajesha & Lokesha Lokesha & Adel M. Sarea, 2020. "Causal Nexus between the Anamolies in the Crude Oil Price and Stock Market," International Journal of Energy Economics and Policy, Econjournals, vol. 10(3), pages 233-238.
    16. N.R. Bhanumurthy & Sukanya Bose & Swayamsiddha Panda, 2014. "Modelling India’s External Sector: Review and Some Empirics," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 8(4), pages 457-493, November.
    17. Ganapati Mendali & Sanjukta Das, 2017. "Exchange Rate Pass-through to Domestic Prices," Foreign Trade Review, , vol. 52(3), pages 135-156, August.
    18. Sumit Ghosh & N. Sivakumar, 2015. "Beta Clustering of Impact of Crude-Oil Prices on the Indian Economy," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 4(1), pages 24-34.
    19. Anand, Mukesh Kumar, 2012. "Diesel Pricing in India: Entangled in Policy Maze," Working Papers 12/108, National Institute of Public Finance and Policy.
    20. Aijaz Ahmad Bhat & Javaid Iqbal Khan & Sajad Ahmad Bhat & Javed Ahmad Bhat, 2023. "Central Bank Independence and Inflation in India: The Role of Financial Development," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 47(4), pages 392-407, October.
    21. Bhanumurthy, N.R. & Bose, Sukanya & Panda, Swayamsiddha, 2014. "Modeling India's External Sector: Review and Some Empirics," Working Papers 14/138, National Institute of Public Finance and Policy.

    More about this item

    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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