Abstract
India is once again facing the problem of rising price of crude oil since 2017 after enjoying low price since 2014. This period has also witnessed moderate rate of inflation in the economy. It is argued that rise in crude oil price also affect the inflation level in the country. The paper using data from 1970 to 2017 intends to examine the relationship between oil price and inflation level in the country. The paper has used Johansen cointegration method to investigate the long run association between the two. It is found that oil price does affect the inflation level in India both in the short run as well as in the long run. In a situation when country is facing problem of decreasing demand for consumption as well as of investment, rise in oil price and its pass through in the form rise in general price level may further deepen the crisis. To increase the demand and keeping the inflation at moderate level the government needs to manage the domestic oil price without transferring the burden on the people. In this light, the government is also required to incentivise the development of alternate source of energy and the technology to economise the use of energy.Keywords: Oil Price, Inflation, Cointegration.JEL Classification: EDOI: https://doi.org/10.32479/ijeep.9015
Highlights
The international crude oil price after reaching its bottom level of $29.8 per barrel in June 2016 has once again started showing rising trend and reached to a level of $76.73 per barrel in October 2018 and to $68.858 per barrel in April 2019
The computed augmented Dicky-Fuller (ADF) value for all the variables are less than the critical value at 1% rejecting the null hypothesis of presence of unit root and accept the alternative hypothesis that variables are stationary at first difference
During 2014 to 2017, India has enjoyed the benefits of low oil price in the form of foreign exchange reserves saved on account of low import bill high economic growth, low inflation etc
Summary
The international crude oil price after reaching its bottom level of $29.8 per barrel in June 2016 has once again started showing rising trend and reached to a level of $76.73 per barrel in October 2018 and to $68.858 per barrel in April 2019. The dispute between Saudi Arabia and Yemen and tension with Iran has raised the oil price level further and is not expected to decline in near future. This is the 5th time the world is facing the problem of oil price shock. The price of crude oil witnessed constant rise since 2000. The inflation level in India since 2014 came down to modest level after remaining high during 2006-2014
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