Oil Price Shock and Its Impact on India
Publication dateJan, 2011
DetailsReport submitted to the South Asia Network of Economic Institutes (SANEI)
AuthorsSudipto Mundle, N. R. Bhanumurthy, Surajit Das, Sukanya Bose
This paper analyses the impact of international 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 international oil prices is combined with alternative scenarios of deregulation of domestic prices of petroleum products to estimate the outcomes for growth, inflation, fiscal balances and external balances during 2012-13 to 2016-17. A 50 per cent shock in international 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 alternative scenarios of pass-through of international oil prices to domestic prices, as the pass-through ratio increases from 0 per cent to 50 per cent and further to 100 per cent and more than 100 per cent, 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.