“Impacts of a
Hike in the Administered Prices of Petroleum Products: Analysis Using an
Applied General Equilibrium Model for India”
Citation: Ganesh-Kumar, A., G. Darbha and
K. S. Parikh. 1998. “Impacts
of a Hike in the Administered Prices of Petroleum Products: Analysis Using
an Applied General Equilibrium Model for India”. Discussion Paper No. 150,
Indira Gandhi Institute of Development Research, Mumbai.
Abstract: The quantitative implications of a
hike in the administered prices of three petroleum products (liquefied
petroleum gas, petrol and high speed diesel oil), which are vital inputs to
most of the activities in the economy, are studied using a static applied
general equilibrium model for India. The results suggest that there would be an
increase in the cost of transportation following the hike in the price of these
petroleum products. This in turn would push up production costs and also the
end-user prices of various goods, resulting in a contraction in the demand by
households. All this would result in an increase in the prices and a decline in
the outputs of non-agricultural commodities and services. On the other hand,
those commodities / sectors such as agriculture are likely to witness an erosion in their producer prices and incomes due to the
increase in the trade and transportation margins between the border and
domestic markets. At the end-user level, the price rise is likely to be largest
in the case of investment goods, imports and inputs in that order, while
consumer prices is likely to witness the smallest increase. The erosion in
agricultural incomes would result in a sharp deterioration in the welfare of
all rural households while urban households might enjoy welfare gains due to
increase in the nominal non-agricultural incomes. The paper also finds that
attempts at providing domestic price supports to agriculture can protect only
the nominal incomes of rural households but not their welfare which would be
adversely affected by the much steeper increase in the prices of consumer goods
than when domestic price supports were absent.