Analysing the pass-through effects of international oil price fluctuations on India for the period 1990-2016
Student name: Ms Nupur Tandon
Guide: Dr Shantanu De Roy
Year of completion: 2018
Host Organisation: TERI School of Advanced Studies
Abstract: Crude oil is a strategically important commodity for all the countries in the developing and developed world. The view persistent in general, has been that any fluctuation, drastic or minor, will have a pronounced effect on a net oil importing economy, like India. India imports about 80% of its oil demand. In such a situation, one must expect that a rise (fall) of prises must lead, in general, to a slowdown (acceleration) in the economic activity, while increasing (decreasing) inflation and affecting the economy via various other transmission channels. These relations between energy prices and their impact have been widely studied in the literature, which we discuss. However, in the time period that is considered; 1990-2016, a quick brush-through of data suggests that such a countercyclical relation between oil prices and economic activity has not existed for India. Instead, what can be seen is that the phases of high growth were also the periods of rising prices, and phases of low growth was also a period when economy took a downturn. Such a relation, however, is not sufficient to conclude a breakdown between international crude oil price and economic activity. Thus, using a Multivariate Vector Auto Regression we explore the relation between international oil prices and various macroeconomic variables and study the causal link from oil prices to various other variables. It is found that the causal link is not significant from oil prices to growth rate, thereby giving evidence in line with our contention, of a weakening relation between the two. Finally, we discuss some possible strong reasons of such a result with respect to the structure of economy, pricing of petroleum products and the heightened crude products’ export capacity of India.
