RESEARCH PROPOSAL

ON
“A STUDY OF THE IMPACT OF
CRUDE OIL PRICES ON INDIAN
ECONOMY”

Submitted by,

Chirag R

1620188

5BBA ‘A’
 A STUDY OF THE IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY

INTRODUCTION

Energy is the prime mover of economic growth and is vital to the sustenance of a modern economy.
Future economic growth crucially depends on the long-term availability of energy from sources
that are affordable, accessible and environmentally friendly.

India meets nearly 35 per cent of its total energy requirements through imports. With the increase
in share of hydrocarbons in the energy supply/use, this share of imported energy is expected to
increase. The challenge, therefore, is to secure adequate energy supplies at the least possible cost.
Although growth of the energy sector is moderate and has, to some extent, served the country’s
social needs, it has put tremendous pressure on the Government’s budget. Energy is essential for
living and vital for development. Affordable energy directly contributes to reducing poverty,
increasing productivity and improving quality of life. In UK, households that spend less than 10%
of their income on heating them homes are officially stated to suffer from fuel poverty. In case of
India, there is no such identification; as a result, some poor do not have access to minimum energy
resources and its utilization for the quality life. Likewise lack of access to reliable energy is a
severe impediment to sustainable social development and economic growth.

India ranks fourth in the world in total energy consumption and needs to accelerate the
development of the sector to meet its growth aspirations. The country, though rich in coal and
abundantly endowed with renewable energy in the form of solar, wind, hydro and bio-energy has
very small hydrocarbon reserves (1.0% of the world’s reserve). India, like many other developing
countries, is a net importer of energy; more than 76 percent of crude oil is being met through
imports. The rising oil import bill ( i.e.140 billion US dollar in 2011-12) has been the focus of
serious concerns due to the pressure it has placed on scarce foreign exchange resources and is also
largely responsible for energy supply shortages. The sub-optimal consumption of commercial
energy adversely affects the productive sectors, which in turn hampers economic growth.
 LITERATURE REVIEW

UMA C SWADIMATH, DR. K H ANILKUMAR, PRASANNA B JOSHI (2013) stats that the
objective of the OPEC organization is the determination of the best means for safeguarding their
interests, devising ways & means of ensuring the stabilization of prices in international oil markets
& secure a steady income to the producing countries and regular supply of petroleum to consuming
nations and a fair return on their capital to those investing in the petroleum industry. One barrel of
crude oil makes 19.5 gallons of gasoline that converts to 73.8 liters of petrol. Crude oil is traded
in the world market in terms of US dollars. Japan has also reduced its fuel demand. India’s total
oil consumption is about 2.2 million barrels per. It imports about 70% of its total oil consumption.
Oil accounts for about 30% of India’s total energy consumption. The fall in demand due to
recession has been much faster than the cuts in production, leading to a fall in prices. In United
States the largest consumer & where recession is deepest, demand for oil reduced to 8%. The
OPEC organization is composed of 12 nations possess over 60% of world reserves of crude that
work as a cartel and to an extent they have a monopolistic approach towards the regularization &
controlling of crude oil prices across the world.

PRIYANSHI GUPTA, ANURAG GOYAL (2015) reported that Indian economy has been
confronting the twin issues of mounting exchange unevenness and persisting inflation. Oil
comprises 33% of the nation's aggregate imports and is considered to have wide-ranging impact
on its economy. The research study observationally looks at how oil value vacillations affect Indian
economy through different channels, viz. genuine part, fiscal approach, outside exchange,
conversion standard and speculation. The effects of patterned connection investigation recommend
that oil is master repeating to yield, value level, securities exchange, gold, loan cost and outside
trade holds, while it is counter-recurrent to cash supply, net fares and swapping scale. Additionally,
it is discovered that oil Granger causes yield, general value level and net fares. The examination
utilizes vector auto-relapse (VAR) investigation and looks at change decay to catch the direct
between conditions among the factors. The basic security tests show that there is no proof of
auxiliary break in the VAR display, affirming the unwavering quality of assessed connections
under the VAR demonstrate.
A.APARNA (2014) proposed that impact of rising oil prices on the economy differs from country
to country depending upon individual energy supply and demand structures. Due to this, all oil
importing countries faced the threat of oil shock; India, being a major oil importer, was particularly
affected. The objective of this study is to determine the relationship between increase in oil price
and the change in GDP, IIP and WPI. Any positive change in the crude oil price has an immediate
negative impact on the increment in the GDP and IIP whereas it affects the WPI positively. While
GDP and IIP show signs of oscillating decay over a period of time, WPI, after a positive increment
and VAR models are used to analyse multi-variate time series data, because they are extremely
helpful in analysing the dynamic behavior of economic and financial time series.

MOHAMMAD RAFEE(2015) the study that addresses the nuances of consequences of oil price
hike and its relationship with exchange rate of rupee against US dollar assumes significance.
Multiple linear regression models are used to analyse the data. The model result suggests that the
import of crude oil continues to rise up when the crude oil future price increases. The model result
suggests that the import of crude oil continues to rise up when the crude oil future price increases.
The oil imports thus became a substantial source of demand for dollar in India’s foreign exchange
market. This strong demand contributes to strengthen the dollar against Indian rupee, among the
other factors. The estimated model equation shows that along with one dollar increase in futures
price of crude oil the imports of crude oil of India raises up by 1.703 Million tonnes.

Dr. ANSHUL SHARMA, Mr. GURMEET SINGH, Ms. MANISHA SHARMA, Ms. POOJA
GUPTA (2012) reported a study on the monetary growth and relationship between oil prices and
inflation . Oil cost unpredictability has increased. In spite of the fact that future oil prices are hard
to foresee, they are commonly anticipated that would rise. The oil prices have begun rising
fundamentally since the inception of the twenty first century and the effect of an oil price shock.
The quick impact of the oil price shock expanded cost of production because of increased fuel
cost. At whatever point there is a general inflation in the economy, the cost of production would
likewise rise causing an decreasing in supply. Then again, Inflation suggests a fall in the
purchasing power of individuals. To put it plainly, Oil Price variance has adverse affects the
economy.
 Statement of the Problem

It is estimated that the import dependence of India associated with crude oil is expected to 94% by
the end of 2030. Therefore, the trouble water in Indian crude oil demand and supply management
is the rise in international crude oil prices followed with the extent of the increase in crude oil
requirement with respect to feasible higher GDP growth 8% to 9%. The import dependence of
India associated with crude oil is from 76% in 2011-12 to 80% by the end of twelfth plan (2012-
17). As crude oil prices are rising globally and imports will be expensive, it is necessary to
understand the consequences of crude oil price rise on the economy.

Therefore, there is an urgent need to look holistic picture of whether the changes in Indian crude
basket prices have any implication on Inflation and GDP growth, or is there any link between
Indian crude oil basket price change and Inflation or Inflation is the cause of concern for slowdown
of GDP growth, what should be our strategy to meet the growing demand of crude oil for economic
growth. It is against this backdrop that we attempt, in this study, to critically analyze the impact of
the change in crude oil prices on Indian economy. Therefore, there is an urgent need to look at
holistic picture of investment in Brown field and Green field projects in petroleum industry, use
of new technologies in the area for Oil and Gas business.

Significance of Study:

Crude oil price is an important parameter for refining industries, which has a bearing on economy,
because it is vital input for productivity. There is a vast gap in demand and production of crude oil
in India. National oil companies are able to produce 23-24% of India’s total requirements of crude
oil. The production of crude oil from public sector enterprises in India has been decreasing due to
old and the maturity of the fields. The significance of the study is to understand, how the increase
in Indian basket price of crude due to raise in international crude oil prices impact the economic
indicators like inflation and GDP growth. The essence of the study is to garner the understanding
of the causal relationship with the phenomenon of complexity of historic facts in crude oil prices
and social reality of economic development and economic growth. The study is essential for both
– knowledge and to help in solving problems of businesses arising out due to inflation, predicting
the future price signal in relation to the business environment and economic growth.
Objectives of the study:

• To study and formulate the impact of crude oil prices on the whole sale price index of Indian
economy.

• To study the waves of inflation rate (consumer price index) due to change in crude oil prices on
the GDP growth of Indian economy.

• To examine and understand the direction of causality and to ascertain the causal relation and
linkage between differential change rate of crude oil prices and Inflation, also between inflation
vis-à-vis GDP growth of Indian economy.

Hypotheses:

 Hypothesis: 1

H01 : Crude oil price plays an insignificant role in rising WPI of Indian economy.

H11 : Crude oil price plays a significant role in rising WPI of Indian economy.

 Hypothesis: 2

H02 : The role of Inflation is insignificant for declining GDP growth of Indian economy.

H12 : The role of Inflation is significant for declining GDP growth of Indian economy.

 Hypothesis: 3

H03 : Crude oil price rate change does not Granger cause inflation.

H13 : Crude oil price rate change Granger causes inflation.

 Hypothesis: 4

H04 : Inflation does not Granger cause GDP growth.

H14 : Inflation Granger causes GDP Growth.

Defining Variable for study:

Independent Variable: Crude oil price

Dependent Variable: Inflation, GDP growth, WPI.

Research Methodology

Crude oil is the fundamental building block among the primary energy which dictates the overall
energy mix in terms of its utility as basic input for economic growth. Oil is often thought of first
fall back energy resource. Its price is the basic unit for all economic activities like agriculture,
manufacturing, project evaluation directly or indirectly, for calculating price of manufacturing
articles, product prices, transportation cost, service industry etc., even in pricing other forms of
energy. Therefore, crude oil price increase is viewed throughout the world as it has a bearing on
all the prices of final goods and services of the economic activities of the world. No economies in
the world, whether exporters or importers are de-coupled from the impact of the increase of crude
oil price. Crude oil price increase can be treated as the source affecting the economy, it may be
treated as the epicenter of earthquake in an economy, which has the potential to cause catastrophe
to any economy and can damage the business activities, in worst condition, it can bring down to
business and economic recession.

This is a quantitative and analytical research. Data analysis is done mainly by statistical and
econometrics methods (deductive process) to find out correlation between the dependent and
independent variables, also empirical relationship of the variables based on the objective and
hypotheses followed with Granger’s causality tests.
Research Gap:

Crude oil prices played a critical role in substantially reducing economic growth in any economy
whether it is developed or developing economy. Worldwide demand for crude oil arises from
demand for the refined products that are made from crude; and changes in crude oil prices are
passed on to consumers in the prices of the final petroleum products. Higher oil prices cause, to
varying degrees, increases in other energy prices. Depending on the ability to substitute other
energy sources for crude the price increases can be large and can cause macroeconomic effects
similar to the effects of oil price increases.

Thus, though energy is the prime mover in an economy, the demand and supply gap of crude oil
must be bridged through import to meet the country’s requirement, hence, crude oil price is an
important parameter in determining reserve position and trade balance and finally balance of
payment. Inflation is also an important area arising with the increase of crude oil prices, with the
increase of inflation, capacity to purchase is reduced and expenditure increases, saving decreases,
ultimately slows down the business and economic activities thus slows down GDP growth.

Research Design:

Research design is a blue print of the study conducted, which includes steps of data collection,
sample selection, process of data and finally interpretation of the data. The period of study is
important in collecting the secondary data.

Sources of Data:

Secondary data sources have been used to collect information about the Indian crude basket prices,
whole sale price index, Inflation rate and GDP growth. Information collected from Secondary data
sources include Central Statistical Organization (CSO) data of Indian Economy, RBI reports,
Indian Economic survey reports, Petroleum Planning and Analysis Cell (PPAC) data, reports and
websites.
Sample Size:

The fundamental purpose of study is to examine whether crude oil price affect inflation, if so,
whether rate of change in crude oil price affect inflation rate and GDP growth and what is the
extent of impact. The study period is from financial year 2013 -2018 for all the three variables.

Tools used for analysis:

1. Karl Pearson’s correlation coefficient

2. t-Test
3. Multivariable Regression Analysis:
4. Ganger causality test