The dynamics of petroleum pricing and the impact of petroleum product prices on key sectors of the economy

The study reviews the dynamics of regulations towards petroleum products and the impact of changes in prices of petroleum products on the key indicators of Indian economy. The deregulation of petroleum sector with reduction in subsidies and linking domestic prices to that of international crude oil prices has led to heavy reduction in the under recoveries of Oil Marketing companies. Cointegration analysis carried with oil prices and the GDPs of key sectors of Indian economy, Index of industrial production (IIP) and with inflation indicators like consumer Price index (CPI) shows that not much of an impact of oil price is felt on production indicators of India like GDP and IIP but Oil price is cointegrated with inflation indicator CPI. While the petroleum products, especially petrol and diesel will continue to be taxed heavily, the taxing mechanism would not only act as a buffer to absorb the fluctuations in international crude prices but would also be a tool for demand management and environmental protection. With the reduction in under recoveries of OMCs and oil subsidies, the government can now divert these resources to subsidize and promote the renewable sources of energy.