Does Crude Oil Price Affect the Inflation Rate and Economic Growth in India? A New Insight Based on Structural VAR Framework

Abstract

Based on a structural vector autoregressive framework on the monthly data from April 1997 to July 2016, this study is an attempt to show the impact of crude oil price on the rate of inflation and economic growth in India. The results showed that the crude oil price has a positive impact on the rate of inflation whereas an inverse relation exists between crude oil price and economic growth. Further, we segregated the crude oil price into two components, that is, positive and negative partial sum of oil price through the nonlinear and asymmetric autoregressive distribution lag framework. A similar kind of result is derived in the case of positive partial sum of oil price on the rate of inflation and economic growth, while a significant negative relationship is found in the negative partial sum of crude oil price on economic growth. From the policy perceptive, we suggest that policymakers may focus on reducing the consumption of crude oil and using renewable energy for accelerating the economic growth. This would not only prevent the domestic economy from international oil price fluctuations and inflation but also assist in achieving sustainable environmental goal of reduced crude oil use. JEL Classification Codes: C3, O4, Q4