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

Author

Listed:
  • 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.

Suggested Citation

  • Bhanumurthy, N. R. & Das, Surajit & Bose, Sukanya, 2012. "Oil Price Shock, Pass-through Policy and its Impact on India," Working Papers 12/99, National Institute of Public Finance and Policy.
  • Handle: RePEc:npf:wpaper:12/99
    Note: Working Paper 99, 2012
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. 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.
    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. 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. 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.
    5. Bhanumurthy, N.R. & Bose, Sukanya & Adhikari, Parma Devi, 2015. "Targeting Debt and Deficits in India: A Structural Macroeconometric Approach," Working Papers 15/148, National Institute of Public Finance and Policy.
    6. 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.
    7. 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.
    8. Anand, Mukesh Kumar, 2012. "Diesel Pricing in India: Entangled in Policy Maze," Working Papers 12/108, National Institute of Public Finance and Policy.
    9. 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.
    10. 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

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

    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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