Revisiting income and price elasticity of gasoline demand in India: new evidence from cointegration tests

Abstract

This study investigates cointegration among gasoline demand, real price of gasoline and real GDP for India for the period 1971–1972 to 2012–2013. It also estimates short-run and long-run elasticity of gasoline demand with respect to its price and GDP. Johansen–Juselius and ARDL bounds test methods establish that gasoline demand, gasoline price and GDP are cointegrated. Regime shift cointegration tests with endogenous structural breaks, on the other hand, ascertain cointegration between gasoline demand and GDP. Gasoline demand is found to be highly elastic with respect to real income and real price in the long-run. However, in the short-run, price is inelastic. The study deviates from previous studies in two important aspects. First, price is found to be elastic in the long-run as opposed to being inelastic in both short term and long term as established in the previous studies. Second, income elasticity has declined in magnitude. These findings are quite intriguing and are consistent with policy changes in the Indian economy. The Toda–Yamamoto version of Granger causality tests establishes long-term unidirectional causality from real income to gasoline consumption. The study discusses possible reasons behind the empirical findings, and finally, a set of policy prescriptions are suggested to reduce the consumption of gasoline, which should have no adverse impact on economy in the long-run.