“Global Oil Price Rise and Policy Options for the Indian Economy: An Analysis Using a CGE Model”

Citation: Panda, M. and A. Ganesh-Kumar. 2008. “Global Oil Price Rise and Policy Options for the Indian Economy: An Analysis Using a CGE Model”. Report submitted to the Planning Commission, New Delhi.

Abstract: This paper uses a static CGE model to examine the impacts of a 70% and 50% rise in global price of crude oil and petroleum products, respectively, on the Indian economy under administered pricing mechanism and free market pricing mechanism for the petroleum products. In particular we consider three cases (a) when the domestic prices of petroleum products are administratively kept unchanged by the government, (b) when the government administratively raises the price of petroleum products by 10%, and (c) when administered pricing mechanism is replaced with market determined pricing for petroleum products. Under free market pricing regime, global oil price rise does have adverse impacts on the Indian economy in the form of 4.7% rise in domestic prices, 0.4% loss in GDP and 1.3% to 3.1% loss in real incomes across different households. The current administered price regime that limits the price pass through does seem to help mute most of the short-run adverse effects on the households with only marginally more adverse impact on the short-run growth of the economy compared to free market situation. However, it puts severe pressure on the fiscal balance of the government, which significantly reduces the level of real investments in the economy that are critical for long-run growth. Choosing to retain administered price regime over market determined price regime essentially involves trading off fiscal balance and long-run growth for short-run benefits.

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