AN

ANALYSIS OF IMPACT OF
CRUDE OIL PRICES ON
INDIAN ECONOMY

A Synopsis by-
Srijan Saxena -15/2038
Sharan Saini -15/2042
Akshit Gupta -15/2043
Tejas Sardana -15/2049
Aneesh Khanna -15/2064
Shubham Garg -15/2074

Submitted to
Ms. Parul Behl
Assistant Lecturer,
Department of Business Economics,
Shivaji College,
University of Delhi.
 Acknowledgement
Gratitude cannot be seen or expressed. It can only be felt
in heart and is beyond description.
In performing our project, we had to take help of some
respected persons, who deserve our gratitude. The
completion of this project gives us much pleasure. We
would like to show our gratitude to Ms. Parul Behl,
Assistant Professor, Shivaji College(University of Delhi)
and Dr. Krishna Ram, BBE Coordinator, Shivaji
College(University of Delhi) for giving us guidelines for
the project throughout the study. We would like to extend
our deepest gratitude to all those who have directly and
indirectly guided us in writing this project.

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 1

 Declaration
We hereby declare that the project entitled, “An Analysis
of Impact of Crude Oil Prices on Indian Economy”
submitted to University of Delhi, is an authentic work
carried by all of us under the guidance of our teacher Ms.
Parul Behl, and this project work is submitted in the
partial fulfillment of the requirements for the award of the
degree of B.A. Hons. Business Economics.
To the best of our knowledge, the matter embodied in the
project has not been submitted to any other
university/institution as a college project.
Group Members
 Srijan Saxena 15/2038
 Sharan Saini 15/2042
 Akshit Gupta 15/2043
 Tejas Sardana 15/2049
 Aneesh Khanna 15/2064
 Shubham Garg 15/2074

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 2

 TABLE OF CONTENTS
1. INTRODUCTION...................................................................................4
1.1 Composition of Crude Oil:................................................................5
1.2 Objective of the Research................................................................6
1.3 Hypothesis........................................................................................7
2. THEORITICAL FRAMEWORK................................................................7
2.1 Impact of falling Crude Oil prices on India.......................................8
3. LITERATURE REVIEW.........................................................................10
4. RESEARCH METHODOLOGY...............................................................13
5. EMPIRICAL ANALYSIS.........................................................................14
5.1 Scatter Plot of X and Y:...................................................................19
5.2 Two Variable Regression:...............................................................20
5.3 Test of Significance of Estimate Parameters.................................20
5.4 Test of Goodness of fit: Coefficient of Correlation........................22
5.5 Analysis of Variance (ANOVA)........................................................22
6. SUMMARY OF REGRESSION OUTPUT................................................24
7. CONCLUSION.....................................................................................25
8. REFERENCES......................................................................................25

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 3

 1. INTRODUCTION
Energy is the prerequisite for sustaining economic growth of a country and vital
for the sustenance of a modern economy. For any developing economy, an
effective strategy for the energy sector is an important element of its overall
economic strategy.

With rapid economic development, there has been a rampant increase in the
energy demand in the country. Crude oil and coal account for nearly two thirds
for the total energy demand in India.

Crude oil, often called ‘Black Gold’ is naturally occurring unrefined petroleum
product consisting of hydrocarbon deposits and other organic materials. Crude oil
is refined and processed into other products such as gasoline, diesel and different
forms of petrochemicals.

Today, India has become the fourth largest consumer of oil in the world. India
meets majority of its oil demand, nearly eighty percent through imports and
therefore, any fluctuation in the global market has a disproportionate impact on
the macro-economic variables which highlight the economy’s performance.

The oil and gas industry is one of India’s six core industries. India is the fourth
largest consumer of crude oil and petroleum products in the world. In 2013, only
US, China, and Japan were ahead of India in the import of these products. India is
a net importer of crude oil. India’s import dependency is almost 80%. In the
context of domestic consumption, India requires imports of almost 77% of
demand.

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 4

1.1 Composition of Crude Oil:

Element Weight
Carbon 83-87% Hydrocarbo
Hydrogen 10 - 14% n Weight
Nitrogen 0.1-2% Paraffins 30%
Oxygen 0.1-1.5% Naphthenes 49%
Sulphur 0.5-6% Aromatics 15%
Asphaltics 6%
Metals <0.1%

The hydrocarbon weight % values are averages.

The imports of Crude Oil in India in 2015 are as follows:

Imports of Crude Oil (in Million

Month (2015) Tons)
January 17.56
February 12.99
March 16.49
April 15.53
May 17.45
June 15.62
July 17.73
August 17.23
September 15.79
October 15.57
November 16.51
December 17.97

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 5

Indian Imports of Crude Oil (Country-wise)

1.2 Objective of the Research

The impact of crude oil prices on the Wholesale Price Index of the products.

The Wholesale Price Index is an index which is used to measure and track the
changes in price of goods which are sold in bulk at a wholesale level, i.e., they are
traded between the organizations rather than individuals. Wholesale Price Index
is an important measure of inflation in various economies.
In the research project undertaken, the Wholesale Price Index is taken up for the
sum of the commodities such as the crude petroleum and mineral oils. The
mineral oil category consists of LPG, petrol, kerosene, aviation turbine fuel, high
speed diesel, bitumen, furnace oil and lubricants.

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 6

1.3 Hypothesis

H0: Crude oil prices do not have any significant impact on the Wholesale Price
Index of the country.

H1: Crude oil prices do have significant impact on the Wholesale Price Index of the
country.

2. THEORITICAL FRAMEWORK

Reasons for fall in Crude Oil prices:

1. Weak demand 
A slowdown in economic activities globally led to weak demand of crude
oil. On one hand the supply of crude oil was on an increase and on the
other hand, its demand was falling. According to the International Energy
Agency, the world’s stockpile of oil is record three billion barrels and it is
continuously rising.
“Demand growth has risen to a five-year high of nearly 2 million barrels a
day but gains in demand have been outpaced by vigorous production from
OPEC and resilient non-OPEC supply”, as said by International Energy
Agency in a report released in mid-November, 2015.

2. Shale oil boom in United States of America

There has been a dramatic increase in the oil production in US in the last 5
years. Since the extraction of shale oil in US, the oil production has gone up
by 3 million barrels per day. For the first time in over 30 years, the US did
not import crude oil from Nigeria, the country whose economy is highly
dependant on crude oil exports. Also, the imports from the OPEC nations
have also been reduced by more than 50 percent.

3. Organization of Petroleum Exporting Countries (OPEC)

Unwillingness on the part of the OPEC nations to stabilize the oil market is a
leading factor in the sharp decline in the crude oil prices all over the globe.
In 2014, at Vienna OPEC nations decided against cutting down their oil

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 7

 production. Since then, the benchmark crude oil price has fallen more than
50 percent in OPEC standards.

The OPEC consists of 34 countries and there are reports of discord amongst
the member nations. Certain OPEC countries such as Iran, Venezuela and
Algeria had displayed willingness to cut down their production to boost the
oil prices. On the other hand, countries such as Saudi Arabia, the United
Arab Emirates and other Gulf Allies declined this proposal to cut production
in the fear of losing out the market share. The point of concern is that, if
OPEC nations still don’t comply to the need of cutting production, it will
lead to further oversupply of oil which will place downward pressure on
crude oil for the long term.

4. Iran Nuclear Deal

Iran nuclear deal is basically a preliminary agreement between Iran and a
group of world powers which seeks to redesign and reduce Iran’s nuclear
facilities. A very important facet of this deal is that it removes many
western sanctions being imposed on Iran and promotes Iranian oil exports.
According to market trend (due to this news), the global oil prices have
already shown a downward trend and it is also been feared that this will
increase the oversupply of crude oil all around the globe.

2.1 Impact of falling Crude Oil prices on India

1. Current Account Deficit

India largely relies on oil imports in order to satisfy its crude oil needs be it
crude petroleum or mineral oils. Almost 80 percent of its oil needs are met
by imports which account for about one third of India’s total imports. The
fall in the prices of crude oil significantly affect India since it drives down
the value of its imports. In turn it leads to reduction in the Current Account
deficit which accounts for the money India owes to the world in foreign
currency. As per the report in Live mint, “A fall in oil prices by $10 helps
reduce the current account deficit by $9.2 billion” which is nearly equal to
0.43 percent of the Gross Domestic Product of the country.

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 8

2. Inflation
Oil is a core commodity and any fluctuation in its price affects the whole
economy of the country. It has various uses including its use in the
transportation of goods and services. Therefore, any change in the price of
crude oil has a direct and significant impact on the prices of goods and
services. Economy as a whole is impacted when petrol and diesel prices rise
as it further leads to a rise in inflation. A very high inflation is extremely
dangerous for any country. The fall in the global crude oil price is a boom
for an oil importing country such as India. According to a report in Money
control, “Every $10 barrel fall in crude oil price helps reduce retail inflation
by 0.2 percent and wholesale price inflation by 0.5 percent.”

3. Relationship between oil subsidy and fiscal deficit

The fuel prices are fixed by the government at a subsidized rate throughout
the country. The losses suffered by the companies due to selling the fuel at
lower rates are compensated by the government. These losses are called
the under-recoveries. Falling oil prices helps in reducing the fiscal deficit by
reducing the losses suffered by the company and reducing the oil subsidy.
However, due to the recent deregulation of diesel prices, the fall in the oil
prices might not effect government’s fiscal deficit significantly. This is
because the government is bound to pay the previous under-recoveries.
The gains from the present situation will be offset by the previous incurred
amounts.

4. Rupee Exchange Rate

The value of Rupee depends on the fluctuations in the currency market
which impacts its demand. It relies greatly on the current account deficit. A
high deficit implies more rupees to be sold in exchange of dollars to pay
bills. This depreciates the value of rupee. Fall in the crude oil prices globally
thus, have a positive impact on the rupee since the current account deficits
start declining.
However, falling crude oil prices also strengthens the dollar which in turn
negates any benefit which arises from the fall in the current account deficit.

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 9

 5. Fall in Indian exports
Any rise or fall in the global crude oil prices has an impact on the exports of
a country. A large number of India’s trading partner countries are net
exporters of oil such as Saudi Arabia, United Arab Emirates etc. A fall in the
oil prices has negatively impacted the economies of these countries and as
a result, the demand for the Indian export products has also fallen. This has
both directly and indirectly impacted India and its companies. India is
already running in trade deficit and at a time when it is imperative to have
high exports and low imports, a fall in the exports is not good.

3. LITERATURE REVIEW

Zied Ftiti, Aviral Tiwari, Ibrahim Fatnassi (2014): Oil price and macro economy in
India: An evolutionary co-spectral coherence approach (Working paper in IPAG
Business School, Paris, France)

The working paper focused on determining whether a relationship is present

between crude oil prices and macro economic variables such as industrial
production, inflation measured by Wholesale Price Index, Trade deficit, external
account sustainability and India-US exchange rate. As per the research conducted
the result is that the degree of co-movement between the oil price index and the
overall macroeconomic variables exhibit different patterns across the
macroeconomic indicators. However, a common feature among the calculated co-
movements is that they are higher in the short-term than in long-term. As
economic implication, this later traduces that an oil shocks has lower long-run
effect (weak persistent effect) on the India macro economy.

Adam Lyons, Michael Hurley, John Hawksworth, William Zimmern (2013): Shale
oil: The next energy revolution, the long term impact of shale oil on the global
energy sector and the economy (PwC UK)

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 10

Oil Shale Reserves in the World:

The research undertaken focused on discovering the long term impacts of the
shale on the global energy sector as well as the economy. Shale oil is rapidly
emerging as a significant and comparatively cheaper resource in the US. Shale oil
is a highly potential resource of crude oil production to spread globally over the
next few decades. If shale oil production is promoted globally, then, it is capable
of providing long term energy security at a lower cost for various countries. The
research analyses that the shale oil production has the potential to reach 14
billion barrels oil per day by 2035. It also visualizes the fact that the fall in the
prices of oil due to exceeding supply will help boost the GDP of net oil importing
countries such as India and Japan by 4-7 percent, while US, UK, the Euro zone and
China might gain by 2-5 percent.

As per the research conducted, the results are “At a global level, shale oil has the
potential to reshape the global economy, increasing energy security,
independence and affordability in the long term. The effects of a lower oil price
resonate along the entire energy value chain, and investment choices based on
long-term predictions of a steady increase in real oil prices may need to be

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 11

reassessed. The potential magnitude of the impact of shale oil makes it a
profound force for change in energy markets and the wider global economy. It is
therefore critical for companies and policy-makers to consider the strategic
implications of these changes now.”

BAIC Economic Review Autumn 2006 (The business and industry advisory
committee to the OECD), it has shown that the world economy slows down based
on the BAIC Member Survey and at that time it was anticipated that the OECD –
wide real GDP growth to drop from 3.1 % to 2.6% in 2007 and risk for growth was
associated to oil price.

Hyun Joon Chang of Korea Energy Economics Institute in his paper “The Impact of
Oil Price Increase on the Global Economy” discussed the impact of an oil price
increase of $5 per barrel on global economy (IMF -2000).

Hamilton (1983) investigated the impact on the US economy. His evidence

suggests that crude oil prices have a strong relationship with the US business
cycle and tends to highlight cost-push inflationary effects

Later Hamilton (2000) reported clear evidence of nonlinearity-oil price increases is

much more important than oil price decreases. An alternative interpretation was
proposed based on the estimation of a linear functional form using exogenous
disruptions in petroleum supplies as an instrument. His study shows that oil
shocks play a crucial role in determining macroeconomic behavior because they
disrupt spending by consumers and firms.

Hamilton extended his research work (2003, 2005, and 2009) and has presented
empirical evidence suggesting that oil price shocks have been one of the main
causes of recessions in the United States.

VARIABLES OF THE STUDY

1. Independent variable: Crude oil price, X

2. Dependent variable: Wholesale Price Index, Y

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 12

 4. RESEARCH METHODOLOGY
The research undertaken has different areas of research such as econometric and
analytical. These areas of research make use of secondary data. The sources of
the data are the publications of various bodies such as the Ministry of Commerce
and Industry, Reserve Bank of India and so on.

Period of study:

The monthly data is collected from the period April’05 to February’16.

The following method will be used:

In this section we will be investigating the relationship between two continuous

variables, such as height and weight, the concentration of an injected drug and
heart rate, or the consumption level of some nutrient and weight gain. The tools
used to explore this relationship, is the regression and correlation analysis. These
tools can be used to find out whether the outcome from one variable depends on
the value of other variable, which would mean a dependency of one variable on
the other. Regression and correlation analysis can be used to describe the nature
and strength of the relationship between two continuous variables.

The research has econometric and analytical areas of research. The econometric
and analytical study of the research has used secondary data. The sources of the
data are primary reports and publications of various bodies of the Ministry of
Petroleum and Natural Gas and Government of India; public sector undertaking
annual reports.

5. EMPIRICAL ANALYSIS
TIME SERIES REGRESSION EQUATION:
AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 13
 Y t = α + βX + µt

Where,
Y t = denotes the Wholesale Price Index (base year 2004-05)

α = denotes constant quantity, i.e., the intercept on the line on Y-axis

β = denotes the coefficient of X

X = denotes the Crude oil price (taken on 1st day of every month)
µt = denotes the residual or error term of the model

BASE YEAR: 2004-05)

Wholesale Crude Oil

Price Index Prices ($)
Months (Variable Y) (Variable X) XY X square Y square
           
Feb'16 310.1 33.75 10465.875 1139.0625 96162.01
Jan'16 332.4 33.62 11175.288 1130.3044 110489.76
Dec'15 330.1 37.04 12226.904 1371.9616 108966.01
Nov'15 351.7 41.65 14648.305 1734.7225 123692.89
Oct'15 355.3 46.59 16553.427 2170.6281 126238.09
Sep'15 354 45.09 15961.86 2033.1081 125316
Aug'15 356.1 49.2 17520.12 2420.64 126807.21
July'15 398.8 47.12 18791.456 2220.2944 159041.44
June'15 420.1 59.47 24983.347 3536.6809 176484.01
May'15 418.9 60.3 25259.67 3636.09 175477.21
Apr'15 390.1 59.63 23261.663 3555.7369 152178.01
Mar'15 386.4 47.6 18392.64 2265.76 149304.96
Feb'15 378.5 49.76 18834.16 2476.0576 143262.25
Jan'15 383.9 48.24 18519.336 2327.0976 147379.21
Dec'14 414 53.27 22053.78 2837.6929 171396
Nov'14 475.3 66.15 31441.095 4375.8225 225910.09

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 14

Oct'14 518.6 80.54 41768.044 6486.6916 268945.96
Sep'14 552.4 91.16 50356.784 8310.1456 305145.76
Aug'14 568 95.96 54505.28 9208.3216 322624
July'14 586.4 98.17 57566.888 9637.3489 343864.96
June'14 582.6 105.37 61388.562 11102.8369 339422.76
May'14 582.3 102.71 59808.033 10549.3441 339073.29
Apr'14 581.9 99.74 58038.706 9948.0676 338607.61
Mar'14 583.6 101.58 59282.088 10318.4964 340588.96
Feb'14 590.1 102.59 60538.359 10524.7081 348218.01
Jan'14 584.5 97.49 56982.905 9504.3001 341640.25
Dec'13 591 98.42 58166.22 9686.4964 349281
Nov'13 590.5 92.72 54751.16 8596.9984 348690.25
Oct'13 596.8 96.38 57519.584 9289.1044 356170.24
Sep'13 604.3 102.33 61838.019 10471.4289 365178.49
Aug'13 595.7 107.65 64127.105 11588.5225 354858.49
July'13 547.3 105.03 57482.919 11031.3009 299537.29
June'13 534.1 96.56 51572.696 9323.8336 285262.81
May'13 511.6 91.97 47051.852 8458.4809 261734.56
Apr'13 513.3 93.46 47973.018 8734.7716 263476.89
Mar'13 534.2 97.23 51940.266 9453.6729 285369.64
Feb'13 545.9 92.05 50250.095 8473.2025 298006.81
Jan'13 536 97.49 52254.64 9504.3001 287296
Dec'12 526.1 91.82 48306.502 8430.9124 276781.21
Nov'12 522.2 88.91 46428.802 7904.9881 272692.84
Oct'12 518.3 86.24 44698.192 7437.3376 268634.89
Sep'12 531.1 92.19 48962.109 8498.9961 282067.21
Aug'12 523.6 96.47 50511.692 9306.4609 274156.96
July'12 489.7 88.06 43122.982 7754.5636 239806.09
June'12 476.2 84.96 40457.952 7218.2016 226766.44
May'12 514.2 86.53 44493.726 7487.4409 264401.64
Apr'12 530.4 104.87 55623.048 10997.7169 281324.16
Mar'12 531.6 103.02 54765.432 10613.1204 282598.56
Feb'12 505.3 107.07 54102.471 11463.9849 255328.09
Jan'12 498.5 98.48 49092.28 9698.3104 248502.25
Dec'11 495.1 98.83 48930.733 9767.3689 245124.01
Nov'11 490.9 100.36 49266.724 10072.1296 240982.81

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 15

Oct'11 478.1 93.19 44554.139 8684.3761 228579.61
Sep'11 473.6 79.2 37509.12 6272.64 224296.96
Aug'11 456.8 88.81 40568.408 7887.2161 208666.24
July'11 461.2 95.7 44136.84 9158.49 212705.44
June'11 454.3 95.42 43349.306 9104.9764 206388.49
May'11 455.1 102.7 46738.77 10547.29 207116.01
Apr'11 441.1 113.93 50254.523 12980.0449 194569.21
Mar'11 380 106.72 40553.6 11389.1584 144400
Feb'11 376.9 96.97 36547.993 9403.1809 142053.61
Jan'11 374.8 92.19 34552.812 8498.9961 140475.04
Dec'10 372.5 91.38 34039.05 8350.3044 138756.25
Nov'10 365.2 84.11 30716.972 7074.4921 133371.04
Oct'10 358.2 81.43 29168.226 6630.8449 128307.24
Sep'10 353 79.97 28229.41 6395.2009 124609
Aug'10 354.3 71.92 25481.256 5172.4864 125528.49
July'10 350 78.95 27632.5 6233.1025 122500
June'10 342.4 75.63 25895.712 5719.8969 117237.76
May'10 340.1 73.97 25157.197 5471.5609 115668.01
Apr'10 356 86.15 30669.4 7421.8225 126736
Mar'10 345.8 83.76 28964.208 7015.7376 119577.64
Feb'10 328.2 79.66 26144.412 6345.7156 107715.24
Jan'10 332.7 72.89 24250.503 5312.9521 110689.29
Dec'09 328.7 79.36 26085.632 6298.0096 108043.69
Nov'09 333.5 77.28 25772.88 5972.1984 111222.25
Oct'09 322.8 77 24855.6 5929 104199.84
Sep'09 317.4 70.61 22411.614 4985.7721 100742.76
Aug'09 327.3 69.96 22897.908 4894.4016 107125.29
July'09 306.3 69.45 21272.535 4823.3025 93819.69
June'09 303.6 69.89 21218.604 4884.6121 92172.96
May'09 279.7 66.31 18546.907 4397.0161 78232.09
Apr'09 276.4 51.12 14129.568 2613.2544 76396.96
Mar'09 249.4 49.66 12385.204 2466.1156 62200.36
Feb'09 250.2 44.76 11198.952 2003.4576 62600.04
Jan'09 255.3 41.68 10640.904 1737.2224 65178.09
Dec'08 258.1 44.6 11511.26 1989.16 66615.61
Nov'08 269.6 54.43 14674.328 2962.6249 72684.16

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 16

Oct'08 280.3 67.81 19007.143 4598.1961 78568.09
Sep'08 295 100.64 29688.8 10128.4096 87025
Aug'08 314 115.46 36254.44 13331.0116 98596
July'08 355 124.08 44048.4 15395.8464 126025
June'08 371.2 140 51968 19600 137789.44
May'08 306.2 127.35 38994.57 16218.0225 93758.44
Apr'08 293.7 113.46 33323.202 12873.1716 86259.69
Mar'08 286.6 101.58 29112.828 10318.4964 82139.56
Feb'08 270.1 101.84 27506.984 10371.3856 72954.01
Jan'08 257 91.75 23579.75 8418.0625 66049
Dec'07 275.9 95.98 26480.882 9212.1604 76120.81
Nov'07 274.8 88.71 24377.508 7869.4641 75515.04
Oct'07 252.6 94.53 23878.278 8935.9209 63806.76
Sep'07 265.4 81.66 21672.564 6668.3556 70437.16
Aug'07 256.5 74.04 18991.26 5481.9216 65792.25
July'07 265.2 78.21 20741.292 6116.8041 70331.04
June'07 251.9 70.68 17804.292 4995.6624 63453.61
May'07 246.3 64.01 15765.663 4097.2801 60663.69
Apr'07 251.4 65.71 16519.494 4317.8041 63201.96
Mar'07 244.5 65.87 16105.215 4338.8569 59780.25
Feb'07 235.4 61.79 14545.366 3818.0041 55413.16
Jan'07 228 58.14 13255.92 3380.2596 51984
Dec'06 265.1 61.05 16184.355 3727.1025 70278.01
Nov'06 260.9 63.13 16470.617 3985.3969 68068.81
Oct'06 262.3 58.73 15404.879 3449.2129 68801.29
Sep'06 243.5 62.91 15318.585 3957.6681 59292.25
Aug'06 274 70.26 19251.24 4936.4676 75076
July'06 273.9 74.4 20378.16 5535.36 75021.21
June'06 258 73.93 19073.94 5465.6449 66564
May'06 254.8 71.29 18164.692 5082.2641 64923.04
Apr'06 252 71.88 18113.76 5166.7344 63504
Mar'06 232.9 66.63 15518.127 4439.5569 54242.41
Feb'06 228.6 61.41 14038.326 3771.1881 52257.96
Jan'06 232.7 67.92 15804.984 4613.1264 54149.29
Dec'05 240.2 61.04 14661.808 3725.8816 57696.04
Nov'05 237.1 57.32 13590.572 3285.5824 56216.41

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 17

Oct'05 241.4 59.76 14426.064 3571.2576 58273.96
Sep'05 244 66.24 16162.56 4387.7376 59536
Aug'05 237.1 68.94 16345.674 4752.7236 56216.41
July'05 219.3 60.57 13283.001 3668.7249 48092.49
June'05 208.2 56.5 11763.3 3192.25 43347.24
May'05 194.2 51.97 10092.574 2700.8809 37713.64
Apr'05 202.3 49.72 10058.356 2472.0784 40925.29
           
N = 131          
           
SUMMATION 49408.1 10362.55 4094458.472 879484.1353 20537306.41
           
AVERAGE 377.16 79.1 31255.41 6713.62 156773.33

[Source : Wholesale Price Index: www.eaindustry.nic.in, Office of economic

Advisor, Government of India, Ministry of Commerce and Industry, Department of
Industrial policy and Promotion (DIPP)

5.1 Scatter Plot of X and Y:

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 18

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 19
FITTING A REGRESSION LINE:

The equation, WPI = 130.8 + 3.113 * Crude oil price, fits the relationship between
the change in WPI on the change in the crude oil price. The estimated slope, ^β is
3.113

^β = Changes∈Y = Change∈% of WPI

= 3.113
Changes∈ X Change∈% of Crude Oil Price

5.2 Two Variable Regression:

{N ( ∑ XtYt )−( ∑ Xt )( ∑ Yt ) }
^β =
{N ( ∑ Xt 2 )−¿ ¿

{131× ( 4094458.472 )−( 49408.1 ) × ( 10362.55 ) }

^β = ^β = 3.113
{131× ( 879484.1353 )−( 10362.55 )2 }

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 20

α^ = Ý – b^ X́

α^ = 377.16 – (3.113 × 79.1)

α^ = 130.8 (approx)

Therefore, the two variable regression equation

WPI = 130.8 + 3.113 * Crude oil price

5.3 Test of Significance of Estimate Parameters

H0: There is no significant relationship between WPI and the crude oil price, i.e.,
β=0

H1: There is a significant relationship between WPI and the Crude oil prices, i.e.,
β > 0 or β < 0

∑e t 2
Variance of ^β = ∑ ¿ ¿ =
{(N −K )∑ ¿ ¿

Standard error of ^β = SQRT (Variance of β)

(1323012.95)
Variance of ^β = × ( 59770.8353 )=0.171587
(131−2)

Standard Error of ^β = SQRT (Variance of ^β ) = SQRT (0.171587) = 0.414231

Applying the “t” test,

β^ −β
t=
Standard Error

(3.113−0)
t= =7.515
0.4141231

The degree of freedom is n-k, where n = 131 (number of observations) and k = 2

(number of parameters)

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 21

The critical t values for different degrees of freedom can be checked in the t –
table. The t test is usually performed at 5 per cent level number 129 under the
degrees of freedom. When 129 degree of freedom is linked with 5 per cent level
of confidence, under the column 0.05, the critical t value derived is 1.96 for the
“two – tailed test”. The value of t calculated in the regression analysis is 7.515.
This value of t (i.e., 7.515) far exceeds the critical t value (i.e., 1.96) at the 5 per
cent level of significance. Therefore, the null hypothesis that “there is no
relationship between Y (WPI) and X (Crude oil price)” is rejected. The rejection of
null hypothesis at 5 per cent level of significance means that there is a statistically
significant relationship between Y (WPI) and X (Crude oil price). More precisely,
the conclusion derived is that we are 95 per cent confident that there is a
statistically significant relationship between WPI and Crude oil price.

5.4 Test of Goodness of fit: Coefficient of Correlation

Explained Variation∈Y
R2 = Total Variation∈Y

Explained variation in Y =∑ nt−1 ¿

Total variation in Y =∑nt−1 ¿

Thus, the coefficient of determination (R2) can be redefined in terms of the ratio
of explained variation in Y and total variation in Y as

Y 2=∑ nt−1 ¿ ¿

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 22

 579227
R 2= =0.304
1902495

r = SQRT ( R2) = SQRT (0.304) = 0.55136

5.5 Analysis of Variance (ANOVA)

(Explained Variation)
F= K −1
¿¿¿

Where k= number of estimated parameters, N = number of observations.

The F – statistics can also be calculated by the following formula,

R2
K−1
F=
( 1−R 2 )
( N −K )

(.304)
(2−1)
F= =56.3448
(1−.304)
(131−2)

The degree of freedom for the Numerator is n-1 = 2-1 = 1

The degree of freedom for the Denominator is n-k = 131-2 = 129

Adjusted R Standard error of Number of

Model R R square square the estimate observations
1 0.55136 0.304 0.2992 0.4142 129

This can be explained as follows:

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 23
 1. Coefficient of X(β) = 3.113693
2. Standard error of β = 0.414231
3. R2 = 0.304591
4. F-value = 56.50243
5. Sum of squares of Regression = 579423.3
6. Intercept (α) = 130.8592
7. Standard error of Intercept = 33.94069
ANOVAa 8. Stand
Model Sum of Squares df Mean Square F Sig. ard
Regression 579483.340 1 579483.340 56.502 .000b
error
1 Residual 1323011.272 129 10255.901
of
Total 1902494.611 130

a. Dependent Variable: V2
b. Predictors: (Constant), V3

Regression = 101.2714
9. Degree of freedom = 129
10.Sum of Squares of Residual = 1323011

Descriptive Statistics

Mean Std. Deviation N

V2 377.161 120.9734 131

V3 79.103 21.4424 131

6. SUMMARY OF REGRESSION OUTPUT

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 24

 Model Summary

Model R R Adjusted R Std. Error of Change Statistics

Square Square the Estimate R Square F df1 df2 Sig. F
Change Change Change

1 .552a .305 .299 101.2714 .305 56.502 1 129 .000

a. Predictors: (Constant), V3

7. CONCLUSION

As the p-value is 0.00000 which is less than 0.05, we reject the null hypothesis. So,
we conclude that fluctuations in Crude oil prices do have significant impact on the
Wholesale Price Index of the country. According to the regression analysis, value
of R2 comes out to be 0.304 which means that 30.4% change in Wholesale Price
Index is explained by 1% change in Crude Oil prices. We observe that there is a
direct relationship between Crude Oil prices and Wholesale Price Index (WPI).
Thus, the model is acceptable.

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 25

 Regression Statistics
R Square 0.304
p-value 0.00000
Observations 131

8. REFERENCES
1. Reserve Bank of India (April 2015) “Monitory Policy Report”
2. BAIC Economic Review (2006) “The Voice of OECD Business”, (The business
and industry advisory committee to the OECD), Autumn 2006.
3. Hamilton, James D., (1983), "Oil and the Macro-economy Since World War
II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pp.
228–248.
4. Hamilton, James D., (1996), "This is What Happened to the Oil Price-Macro
economy Relationship," Journal of Monetary Economics, vol. 38(2), pp. 215–
220.
5. Hamilton, James D., (2003), "What is an Oil Shock?" Journal of
Econometrics, vol. 113(2), pp363-398.
6. Hamilton, James D., (2005), "Oil and the Macro-economy" in The New
Palgrave Dictionary of Economics, ed. by S. Durlauf and L. Blume, (London:
MacMillan, 2006, 2nd ed.).
7. Hamilton, James D., (2009), "The Causes and Consequences of the Oil Shock
of 2007–08," NBER Working Paper No. 15002, National Bureau of Economic
Research.

8. Market Realist “What does the fall in crude oil price mean for India’s
economy”

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 26

AN ANALYSIS OF IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY 27