On the dynamics of Indian GDP, crude oil production and imports

• DOI: http://doi.org/10.1111/opec.12047
• Date: 01 June 2015
• Author: Aviral Kumar Tiwari
• Published date: 01 June 2015

On the dynamics of Indian GDP, crude oil

production and imports

Aviral Kumar Tiwari

Faculty of Management, IFHE University, IBS Hyderabad, Dontanpalli, Shankerpalli Road, Hyderabad,

Andhra Pradesh, India. Email: aviral.eco@gmail.com

Abstract

This study investigates the static and dynamic causal relationship among income, crude oil produc-

tion and imports for the Indian economy.The static-short-run Granger causality shows that income

and crude oil imports Granger-cause domestic crude oil production. This implies that gross domestic

product (GDP) and oil imports contain important information in predicting the production of crude

oil not the vice versa.The er ror correction value −0.415 implies that disequilibrium in GDP will get

corrected in the long run by the speed of adjustment of 41.5 per cent in a year.The dynamic analysis

reveals that the most exogenous variableis crude oil production as it is mostly dependent on itself,

and relatively less is accounted by other twovariables; GDP is a relatively less exogenous variable,

and crude oil exports fairly good proportion of forecast error. Further, wefound that the most endog-

enous variable is crude oil imports which is mostly dependent on crude oil production.

1. Introduction

India’s trade deficit, which reflects the excess of its merchandise imports overexports, has

reached 10.3 per cent of its gross domestic product (GDP at market prices) in 2011–12.

According to the Balance of Payments statistics for the year 2011–12 released by the

Reserve Bank of India, the deficit has increased from Rs. 5956 billion in 2010–11 to Rs.

9121 billion in 2011–12. This increase of Rs. 3165 billion has resulted in the deficit swell-

ing from 7.8 per cent of GDP at market prices in 2010–11 to almost 10.3 per cent in 2011–

12. Is this increase a cause for worry? The answer depends on the determinants of the

deficit. One of the possible reasons behind a progressivelywidening trade deficit could be

a decline in exports accompanied by an increase in imports, but it has not been so in India’s

case. Merchandise exports grew by 38 per cent in 2011–12, which was higher than their

growth of 22 per cent in 2010–11. But the import growth of 79 per cent in 2011–12 was far

higher than the 17 per cent growth in the previous year.Hence, the rise in trade deficit can

be attributed to a much faster rise in imports compared with exports. So now, a question

arise: What are the reasons behind the rapid rise in imports? Imports can be divided into

JEL Classification: C22, O41, Q38.

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two broad groups: oil and non-oil.According to the data made available by the Directorate

General of Commercial Intelligence and Statistics of the Ministry of Commerce, India’s

crude oil imports during 2011–12 were of Rupees 4822.817 (in billion). This represented

an increase of about 54 per cent increase in the oil imports bill over the previous year.1In

sharp contrast, non-oil imports, despite growing at a higher rate of 33.5 per cent in 2011–

12, compared with 26.2 per cent in 2010–11, show a much lower rate of growth than oil

imports. There is no doubt that high growth in oil imports has been the main factor behind

the sharp rise in imports bill. Additionally, global crude prices are rising at an unprec-

edented rate which have substantially inflated India’s import bill. India’s crude imports

comprise a basket of three varieties—Brent, Dubai and Oman. Given the composition,

even if one among the three experiences sharp increases in prices, the overall price of the

basket does not get affected by the same extent. However,during the last year, all the three

crude varieties saw their prices rising fast. The average price of the Indian basket varied

between US$65.5 and US$99.8/b, yielding an average price of US$79.5/b for the year.

This was a steep jump vis-à-vis US$62.5/b in 2006–07. Interestingly, the volume of oil

imports experienced a lower growthof 8.9 per cent in 2007–08 vis-à-vis 13.13 per cent in

2006–07. This has further decreased to 4.3 per cent in 2011–12. Thus, the increase in oil

imports was primarily value driven and not volume driven. High crude prices, therefore,

have been the main determinants of India’s rising trade deficit. Given India’s chronic

dependence on oil imports, with the latter accounting for almost one-third of the country’s

total imports, the Indian economy’s import bill and trade balance will continue to remain

sensitive to movements in world oil prices. With global crude prices inching close to

US$150/b, the import bill and trade deficit are likely to increase further.Assuming that oil

prices will continue to rise in the near future, will the trade deficit become unsustainable?

This depends on the Indian economy’scapacity to finance the deficit. The high trade deficit

has resulted in an increase in the current account deficit as well. From 2.7 per cent of GDP

in 2010–11, the current account deficit has increased to 4.3 per cent of GDP in 2011–12.

However, the balance of payments is yet to come under stress, due to a healthy capital

account surplus.

Taking into account the above-mentioned situation, there is imperative need in the

context of India to find whether dependence on the crude oil has anything to do with GDP,

i.e. whether crude oil contributes in GDP, and if not, then why India is becoming so much

dependent on the imports of crude oil and why not India is looking for substitutes of it as its

use either in the form of energy generation or direct consumption is harmful for environ-

ment. There are a number of studies which haveanalysed the causal relationship between

energy consumption, normally measured by electricity consumption, and GDP and have

found that energy consumption does not Granger-cause GDP.2That is why this study is

intended to analyse the dynamic relationship among the three related variables of the

Indian economy, namely, GDP, domestic production of the crude oil and imports of the

Indian GDP, crude oil production and imports 163

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