Abstract
Oil is an important input used in almost all the economic activities of any country. Hence, rise in its price is likely to adversely affect economic growth of oil importing countries like India. The present paper intends to examine the impact of oil price on economic growth of India. In order to examine the presence of cointegration relationship between economic growth, oil price, capital formation and inflation in the case of India, the study has used Pesaran’s bound test method. The study finds that the variables under study exhibits long run cointegration relationship. VECM results suggest that oil price, capital formation and inflation Granger cause economic growth in the long run. Further, the result shows that the coefficient of oil price is negative and significant implying that oil price in India adversely affects country’s economic growth. The study suggests that the government should refrain from imposing additional taxes in order to avoid rise in oil prices and its subsequent adverse effect on economic growth of the country.
Highlights
Large amount of literature demonstrates that fluctuation in oil price have significant influence on economic activity of an economy
Since oil is one of such products which touches almost every unit of the economy and affects the economic activity of a nation, the association between oil price and growth of an economy has drawn the attention of many scholars that resulted in large number of studies examining this relationship
Many economists argue that rising price adversely affect the economic activities and economic growth
Summary
Large amount of literature demonstrates that fluctuation in oil price have significant influence on economic activity of an economy. Increase in price of crude oil disturbs the economic activity of the country by influencing country’s current account balance and foreign exchange reserves, inflation rate in the economy and value of the domestic currency. Decline in international price has not always reflected a corresponding and proportionate decline in domestic price of oil products due to tax and exchange rate factors It is the domestic price of petroleum products and not crude oil price which directly affects the inflation and economic activity of a country. The period since 2014 witnessed higher growth rate and low inflation which correspond to declining crude oil prices globally. From this perspective, the paper aims to study the relationship between price of oil and economic growth in the case of India.
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