IGIDR Working Paper: Integrated Model of Computable General Equilibrium and Social Cost Benefit Analysis of an Indian Oil Refinery: Future Projections and Macroeconomic Effects

NO : WP-2016-024

AUTHOR :  Shovan Ray, A. Ganesh Kumar, Sumana Chaudhuri

TITLE :  Integrated Model of Computable General Equilibrium and Social Cost Benefit Analysis of an Indian Oil Refinery: Future Projections and Macroeconomic Effects


Social Cost Benefit Analysis has long been used as a useful tool to appraise and evaluate the value to a society of a range of investment projects. Various important aspects of this method have been subject to scrutiny over the decades, such as the appropriate discount rate, whether the Ramsey Rule of ‘pure time preference’ should be applied as impatience with a positive rate or zero-rated with concern for future generations; these are important concerns since the choice of discount rates deeply affect the valuations of future income streams. Other aspects concerning financial flows and appropriate ‘shadow prices’ have also undergone considerable attention. However, when a mega-project with the character of a ‘universal intermediate’ is considered, its multiplier effects may be wide-ranging and permeate several economic and social layers, and may be captured only in the aggregates. This study, a sequel to a paper that ignores such macro-aggregative benefits, examines the costs and benefits of Vadinar refinery in Gujarat with a focus on this welfare dimension on society for the project. The study allows for this large scale benefit accrual and examines the net economic benefit of refining at Vadinar by Essar Oil to the region, the state and the country by Social Cost Benefit Analysis.

The framework thus explores a methodological breakthrough in SCBA studies. In constituting the macroeconomic effects of expansion of the mega oil refinery, the economic impact is estimated using the Computable General Equilibrium (CGE) model and incorporated into the cost benefit analysis. This assimilation of CBA with macroeconomic externality obtained from the CGE model framework is perhaps only one of its kind in economic analysis of major infrastructure projects of any country. SCBA when combined with CGE as an analytical tool can be gainfully employed to appraise or evaluate large scale projects like oil refineries, especially when they make a splash with their mega-sizes as the Essar Oil refinery is.

Keywords :Social Cost Benefit Analysis, Economic Impact, Computable General
Equilibrium (CGE) Model, Oil Refinery

JEL Code : B41, C51, C52, C53, C54, C55, D50, D58, D60, D61, D62, H23, H43, L71, O22,

Weblink : http://www.igidr.ac.in/pdf/publication/WP-2016-024.pdf