Abstract
The changes in the price of oil by creating supply-side shocks, inflation risks, and exchange rate risks, generate havoc in the development process of oil-importing countries like India. In this perspective, this study examined the degree and direction of connection among the price of oil and economic growth in India while controlling for the influences of exchange rate, real interest rate, rate of inflation, net inflows of foreign direct investment, and trade openness. The work uses the auto-regressive distributed lag bounds test approach and provides evidence in support of the negative effect of oil price changes on the long-run growth of the Indian economy when net inflows of foreign direct investment and foreign exchange rate exert statistically significant negative effects on this relationship. However, trade openness has a statistically significant positive effect. It is further observed that this long-run relationship has a convergence tendency towards the equilibrium value through short-run adjustments, thereby making the estimated relationship stable. The implication is that international oil price fluctuations can be used to predict the country’s long-run economic growth. Besides, a policy effort is required to promote alternative energy consumption at home to keep oil demand under control. Furthermore, trade policies are required to be revisited to boost exports by the country to accommodate the negative effects of increases in the price of oil at the international level on economic growth.
Keywords: Economic Growth, Exchange Rate, India, Inflation, Oil Price.