Abstract
This paper analyses the impact of transmission of international oil prices and domestic oil price pass-through policy on major macroeconomic variables in India with the help of a macroeconomic policy simulation model. Three major channels of transmission of oil price shock viz. import channel, price channel, and fiscal channel are explored within a structural macroeconomic framework. The policy options of gradual deregulation of domestic oil prices in the scenario of occurrence of a one-time shock in international oil prices as well as no oil price shock situation are analysed for their impact on growth, inflation, fiscal balances and external balances during the 12th Plan period of 2012–2013 to 2016–2017. The simulation results indicate that in the short run the deregulation policy would have adverse impact on the growth as well as on the inflation. But if this policy is complemented with the policy of switching of subsidy bill to capital expenditure it might result in positive growth effects in the long run. Given, the current pass-through policy, a 10 % rise in oil prices result in a 0.6 % fall in growth while in the full pass-through situation, it can reduce the growth by 0.9 percentage point on an average. Overall, the paper demonstrates that the extent of pass-through has differential impact on growth and inflation over the 12th Plan period. Hence, the policy priority of oil price deregulation must be carefully weighed.
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Notes
- 1.
The under recovery of oil marketing companies is the difference between administered domestic price and trade parity price of oil multiplied by the quantity sold. Under recoveries are financed by absorption by the oil companies, the oil bonds and the government subsidies. If the government has to compensate the oil companies fully for their under recovery, then the subsidy bill of the government becomes equal to total under recovery. Between 2004–2005 to 2009–2010, the companies were allowed to float special oil bonds with sovereign guarantee for covering up part of their under recoveries. (see Table 13.1) Since 2010, these oil bonds have become part of the fiscal deficit in the Central government budget. Therefore, effectively the under recoveries have become equivalent to oil subsidy barring the component of under recovery, which is absorbed by the oil companies themselves.
There are serious conceptual problems in both the understanding of under-recoveries as well as in their estimation. (See Report of the B.K. Chaturvedi Committee on the Financial Positions of the Oil Companies, GOI 2008; Sethi 2010)
- 2.
About three-fourth of the total revenues from oil are due to revenues collected from indirect taxes, mainly customs, excise and sales taxes. While excise duties and countervailing duty is levied as specific duty, the sales tax is an ad valorem tax. The sales tax is collected by the State governments and other revenues accrue in the Central exchequer. The rest one-fourth of revenue from this sector consists of dividends of PSUs, corporate tax and so on, which essentially accrues to the Central government exchequer.
- 3.
Refer to Bhanumurthy et al. (2012) for the flow diagram of the complete model.
- 4.
In the following system of equations the notation convention adopted is to denote all exogenous variables with a bar \([\bar{x}]\), all policy variables with a hat \([\hat{x}]\), and growth rates with a dot \([\dot{x}]\).
- 5.
The inflation in administered price component of WPI has been calculated in the following manner. We have considered six main broad commodity groups—viz. cereals, fertiliser, iron & steel, mineral oil, electricity and coal from the WPI basket—prices of which are significantly influenced by the government (if not controlled directly). We calculate the relative weights of each commodity group by dividing their respective weights in the overall WPI basket by the total weight of all these six commodity groups taken together – separately considering 1980–81 base for the years 1990–1991 to 1993–1994, considering 1993–1994 base for 1994–1995 to 2004–2005 and considering 2004–2005 base for the years 2005–2006 onwards. The relative weights remain constant for each commodity groups unless the base changes. We apply simple splicing technique to calculate a long time series of index numbers of the wholesale prices for each of the six administered commodity groups. Now we add the index numbers of each group multiplied by their respective relative weights to get a continuous series of composite index numbers from 1990–1991 to 2010–2011. The annual percentage changes in these index numbers give us the weighted average annual inflation in prices of administered commodities.
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Acknowledgement
The authors would like to thank Sudipto Mundle and M Govinda Rao for their valuable advice and support throughout the preparation of the chapter. Earlier draft of this chapter was presented at NIPFP, SANEI conference in Dhaka, QRE conference at NCAER and at 48th Annual conference of the Indian Econometric Society held in Puducherry. We would like to thank participants at these presentations and their valuable comments, especially Pulapre Balakrishnan, Renu Kohli, Kirit Parikh, Kavita Rao, Ramprasad Sengupta, Shekhar Shah, Dilip Nachane, NSS Narayana, Balwant Singh, S. R. Osmani Parthasarathi Shome and Mukesh Anand. We acknowledge the financial support from the South Asia Network of Economic Research Institutes (SANEI) for this work.
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Das, S., Bose, S., Bhanumurthy, N. (2014). Oil Price Shock, Pass-Through Policy and its Impact on India. In: Khasnabis, R., Chakraborty, I. (eds) Market, Regulations and Finance. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1795-4_13
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