What Happened to the Oil Price and Macro Economy Relationship? Does It Tell the Same Story? A Case of Indian Economy

Abstract

This study assesses impact of asymmetric oil price shocks on India’s economic growth by using autoregressive distributive lag (ARDL) model and fully modified ordinary least square (FMOLS). This study covers dataset on monthly frequency from 2004: Q1 to 2020: Q4. Findings from the ARDL model shows that real oil prices don’t have short run or long-run relationship with economic growth. In other words, real oil prices fluctuations are no longer able to explain the variations in India’s economic growth. This because of, in India, the prices of petroleum products have been insulated through subsidies from the volatility of international crude oil prices to curb the domestic inflation, so oil price may not have directly impact on domestic inflation. But in the long run, inflation can reflect into worsening fiscal deficit and can erode the public debt’s sustainability.

Keywords: Crude oil price, Index of industrial production, ARDL model, economic growth, India, CUSUM Test, CUSUMSQ.

JEL Classification: E00, E10, E17, E44