Oil Price Shock and Its Impact on India

• Completion date जनवरी., 2011
• Sponsor South Asia Network of Economic Institutes (SANEI)
• Project leader Sudipto Mundle, N.R. Bhanumurthy
• Other faculty Surajit Das
• Consultants/Other authors Sukanya Bose
• Focus

  This paper alyses the impact of intertiol oil price shocks on major macroeconomic variables in India with the help of a macroeconomic policy simulation model. Major three channels of transmission viz. import channel, price channel, and fiscal channel are explored with the help of a macroeconomic (simultaneous equations) framework. The occurrence of a one-time shock in intertiol oil prices is combined with altertive scerios of deregulation of domestic prices of petroleum products to estimate the outcomes for growth, inflation, fiscal balances and exterl balances during 2012-13 to 2016-17. A 50 percent shock in intertiol oil prices at the beginning of 12th Plan period, results in a fall in average GDP growth, while it pushes the inflation rate up both in the year of shock, as well as on an average during the 12th Plan period. In the year of shock the effects are most severe, which gets mitigated slowly by the end of 12th Plan period. For altertive scerios of pass-through of intertiol oil prices to domestic prices, as the pass-through ratio increases from 0 percent to 50 percent and further to 100 percent and more than 100 percent, the budgetary subsidy falls with the decline in real economic growth, is likely to become sharper and the inflation rate is likely to go up further. The fiscal deficit to GDP ratio might come down but possibly at the cost of lower growth and higher inflation. If the decline in revenue deficit is compensated by increase in capital expenditure, then the fall in real GDP growth may not be much.