crude oil price on the economic growth of India

Topics: Peak oil, Petroleum, Inflation Pages: 12 (4009 words) Published: May 7, 2014


This paper analyzes empirically the effect of crude oil price on the economic growth of India.

Submitted By:

1. D13011Joseph J Manavalan
2. D13021Sayed Sameem
3. D13029Surat Dayal
4. D13 Biju

EXEC-PGP, DUBAI(2013-2016)

Table of Contents:

1. Introduction------------------------------------------------------------------ 3 2. Oil crisis and Indian Economy-------------------------------------------- 4 a. Balance of Payment
3. CAD and Import Bill-------------------------------------------------------- 5 a. Inflation
4. Solution----------------------------------------------------------------------- 9 i. Increased hydrocarbon production
ii. Unconventional resources
iii. Foreign acquisitions
iv. Deregulation of Oil
v. Solar Power

References------------------------------------------------------------------------- 14 Appendix-------------------------------------------------------------------------- - 15

India’s growth engine has been predominantly driven by oil (over two-thirds of which is imported). This situation may not change much over the next few decades. The government is considering exploration of shale gas but that will take a long time. Thus the oil import bill will remain a function of both quantity imported and the international price of crude. Despite price increase and volatility, oil imports are a necessity. Further, shortfall in domestic coal production has resulted in increased dependence on imports. Hence reducing CAD through lowering oil and coal imports is not a feasible option. India is emerging as an industrialized country and the energy requirements are largely fulfilled through crude oil imports. Estimates suggest that energy demand of the region will increase three times in the next fifteen to twenty years (SAARC 2011). Economists through empirical analysis of different economies have indicated that oil price volatility has significant impacts on economic growth. IEA (International Energy Agency) (2004) in its report concludes that the impacts are even more severe for developing economies. Report mentions that the reason behind these severe impacts is that use of energy in developing countries is inefficient. Alternative energy resources are not much developed for most of the developing countries as compared to developed countries. Further net oil-importing developing countries use oil in double quantity as compared to developed countries to produce a unit of economic output. Moreover, developing countries are less capable to deal with financial crises created by higher oil import costs. Bacon (2005) in a report for ESMAP (Energy Sector Management Assistance Program) and UNDP (United Nations Development Programme) analyzed the impacts of higher crude oil prices on population and economy of poor countries. In this report, it is observed that $10 per barrel increase in the price of crude oil, for some poor countries with per capita income below 300$,economic growth can decrease 4%. If oil price increase is $20per barrel the shock can be double. In contrast, countries with higher foreign reserves and GDP per capita over 9000$, the decrease in GDP growth rate can be on average 0.4%. A sustain increase of $10 per barrel in crude oil price reduces world GDP by 0.5% over all and further 0.5% for net oil importing countries. Keeping in view these reports about significant impacts of crude oil price on economic growth for developing countries it would be interesting to know the situation in Indian-Subcontinent. In last three decades oil prices are more volatile than time period before OPEC(Organization of the Petroleum Exporting Countries) started to play its role in world oil supply and pricing.

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