Original Article

Economic Activities and Oil Global Business Review

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Price Shocks in Indian Outlook: © 2021 IMI
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DOI: 10.1177/0972150921990491
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Preeti Sharma1 and Avinash K. Shrivastava2

Abstract
The current study intends to find out the linkages between crude oil prices and economic activity in
the context of Indian economy. The macroeconomic variables such as gross domestic product (GDP),
unemployment, industrial output, inflation, exchange rate and stock market prices have been used as a
proxy to economic activity. We have analysed the sample data of 30 years, that is, from year 1991 to
2020. To inspect the short-run relationship between oil prices and the above-mentioned macroeconomic
variables, Granger causality test has been applied after removing the presence of unit root through
differencing the series. To investigate the long-run relationship, vector error correction model (VECM)
has been applied after testing cointegration through the Johansen method of cointegration. The
findings of the study show that oil prices have short-run causality with all the variables, that is, GDP,
unemployment, industrial output, inflation, exchange rate and stock market prices, while they have a
long association with inflation, industrial production and unemployment. Further we find a negative
relationship between oil prices and unemployment, industrial output, inflation and exchange rate and a
positive relationship with GDP and stock prices.

Keywords
Macroeconomic activity, oil prices, Granger causality, Johansen cointegration test, vector error
correction model

1 Amity Global Business School, Amity University, Noida, Uttar Pradesh, India.
2 International Management Institute, Kolkata, West Bengal, India.

Corresponding author:
Avinash K. Shrivastava, International Management Institute, Kolkata, West Bengal 700027, India.
E-mail: kavinash1987@gmail.com
2 Global Business Review

Introduction
Due to its outstanding significance in meeting world’s energy needs, crude oil has always been one of
the key indices of economic activity worldwide. Many studies by different scholars have established an
association between oil prices and different macroeconomic variables in the economy (Ahmed & Wadud,
2011; Herrera et al., 2019; Iwayemi & Fowowe, 2011). Different studies suggest different causes for oil
price fluctuations, and those fluctuations are responsible for stimulating and slowing down economic
development in the country. It has also been observed in the past that any major economic or non-
economic event is followed by a rise in the prices of oil. A substantial rise in oil prices just after recession
is evident in the history of American recessions (Sill, 2007). The increase in crude oil prices may be
because of an increase in demand and fear of disruption in the supply of oil in such conditions. Small
shocks to oil supply or demand result in a high elasticity of prices in oil (Arezki et al., 2017). Speculation
may play a significant role in increasing oil prices (Krugman, 2008). There may be numerous explanations
for oil price volatility, as the literature indicates, but historical examples demonstrate the connection
between oil prices and economic activity (Trang et al., 2017; Wei & Guo, 2016).
The value of oil and the influence of its price fluctuations can be observed in the economic and social
facets of human life. The prevalent view among economists, therefore, is that there is a direct connection
between the economic advancement of a country and changes in oil prices. The effect of oil price
volatility on economic activity in different types of economies has been verified by a wide body of
studies. These effects are likely to differ between developed and developing economies, as well as
between oil-importing and oil exporting countries. The effect of oil prices on real economic activity
encompasses both the supply and demand sides in an economy. The effect on the supply side can be seen
because oil is one of the significant inputs in the process of production and transportation. Thus, higher
oil prices raise the cost of production and transportation, forcing businesses to decrease their production.
Oil price adjustments, on the other hand, often have demand-side impacts on consumption and investment.
Consumption is indirectly influenced via its positive relationship with disposable income. The price
increases are contributing to a reduction in buying power. The current article explores the effect of
fluctuations in oil prices on the economic activity of India (developing country).
Considering all of the above-mentioned economic issues, this research focusses on the linkages
between oil prices and macroeconomic variables. The study progresses as follows: The second section
discusses literature related to the proposed research followed by a rationale of interrelation between oil
and macroeconomic variables. The third section provides objectives of the study. In the fourth section,
the details related to data and methodology are provided. The fifth section describes empirical results
which include the definition of variables, econometric modelling and discussion thereof. The sixth
section concludes by providing the threat to validity, its implications, future research directions and the
managerial implications of the proposed study.

Review of Literature
Various researchers have worked in the direction of establishing the impact of increase and decrease in oil
prices on macroeconomic variables. Cunado and De Gracia (2005) examined the connection between oil
prices and economic movement and consumer price indices for six Asian counties for the time period
1975–2002. Their study suggests a significant short-run association between oil prices and macroeconomic
variables taken into consideration. Lescaroux and Mignon (2008) investigated both short-term and long-
term association between crude oil prices and certain macroeconomic and financial variables (taking gross
Sharma and Shrivastava 3

domestic product [GDP], household consumption expenditure, Consumer Price Index [CPI], unemployment
rate and share prices) of oil-exporting and -importing countries (OPEC), oil-exporting and -importing
countries. Rafiq et al. (2009) surveyed the influence of oil price fluctuations on joblessness and investment
in the Thai economy (using the granger causality test and autoregressive function). Iwayemi and Fowowe
(2011) studied the connection between oil and other macroeconomic variables for the period between 1970
and 2006 for the oil exporters of Africa (Algeria, Egypt, Libya and Nigeria) using vector autoregression and
granger causality test. The long-term co-trending and co-movement in the price of gold, the real exchange
rate for the US dollar, stock price and the oil price of crude oil in the world economy were examined by
Samanta and Zadeh (2012). Bhunia (2013) studied the cointegration relationship between the Indian
economy’s oil price and financial variables, using the Johansen cointegration analysis and the Granger
causality method. Jain and Ghosh (2013) tested cointegration and Granger causality among global oil
prices, Indian rupee–US dollar exchange rate and precious metal (gold, platinum and silver) prices for the
period 2009–2011. Ozturk (2015) analysed the impact of oil price shocks on industrial production, money
supply and imports in Turkey using Granger causality analysis. Ratti and Vespignani (2016) examined the
relationship between oil prices, global industrial production, central bank interest rate and monetary
aggregate using the Global Factor-Augmented Error Correction Model (GFAECM). Kumar (2017) made
an attempt to explore the dynamic impact of variation in crude oil prices in global market on Indian stock
market volatility of crude oil. Troster et al. (2018) studied the causal relationship between oil values,
renewable energy consumption and economic movement in the USA (for the period 1989–2016) using
Granger causality. Their results confirmed unidirectional causation from oscillations in oil prices to
economic progression. Rao and Goyal (2018) explore the effect of fluctuations in the price of non-energy
commodities and oil on production, inflation and real effective exchange rate (REER) in India and
significant imports of commodities and oil. Troster et al. (2018) studied the causal relationship between oil
values, renewable energy consumption and economic movement in the USA (for a period of 1989 to 2016)
using Granger causality. Their results confirmed unidirectional causation from oscillations in oil prices to
economic progression. Oteng-Abayie et al. (2018) analysed the macroeconomic determinants of crude oil
demand by considering the case of Ghana. Asaleye et al. (2019) studied the impact of change in oil price on
employment in the Nigerian context. Sharma et al. (2019) analysed whether oil prices are an important
indicator of 31 macroeconomic variables of Indonesia, using monthly data ranging from 1986 to 2018.
Using auto-regressive distributed lag (ARDL) method, Phoong and Phoong (2019) conducted a similar
research on Malaysian economy. Mukhtarov et al. (2020) explored the effects of oil prices on Azerbaijan’s
economic growth, export, inflation and exchange rate using Johansen cointegration.
From the conclusive summary of related literature, a wide gap can be observed in studies on the
offered topic in the Indian context. The transmission channels on the association of crude oil prices and
other macroeconomic variables in the Indian context are very few. This gap can be used to check the
validity and affirmation of relationship and the impact of oil prices with other selected macroeconomic
variables in the Indian context. Therefore, the present study intends to make some conclusive contributions
to the relationship between crude oil prices and industrial value-added, inflation, foreign exchange rate
(between Indian rupee and US dollar) and stock prices (S&P BSE SENSEX).

Framework of the Study

The relationship between fluctuations in oil prices and the direction of economic activities has been
established in the current study. In this section, we have displayed a simple framework to identify
different macroeconomic variables to represent economic activities in the country. As a standard, the
4 Global Business Review

price of crude oil refers to the spot price of a barrel. The current analysis uses Brent crude oil prices,
since it usually remains the benchmark for other crude oil prices. The indicators used for economic
activity include GDP, industrial production, inflation, exchange rate, stock prices and unemployment.
Please note that all the figures drawn in this section are based on the data taken for the period from 1991
to 2020.
Oil Prices and Unemployment
Unemployment is an indicator of the economy’s stability. Unemployment rate, which is the number of
unemployed people separated by the number of people in the work force, is the most frequent indicator
of unemployment. The National Sample Survey Office (NSSO) describes the status of a person who is
searching or available for jobs, and also a person who is not in a job, neither seeking a job nor available
for work, that is, ‘Unemployed’, as unemployment.
The negative and meaningful relationship between oil prices and industrial production suggests
shocks in oil prices are reducing developing countries’ industrial production. Such shocks affect industrial
efficiency by raising the cost of both imports and exports, and by decreasing demand for consumption
and investment. High oil price is also associated with unemployment in the economy. The statistical
relationship between the unemployment rate of a country and its economy’s growth rate was proposed
by Okun’s rule (Yale professor and economist Arthur Okun). One iteration of Okun’s legislation specified
rather clearly that gross national product (GNP) increases by 3% when unemployment declines by 1%.
The increased prices of goods and services decrease the real income of the consumer, compelling him/
her to cut down his expenditure. This disturbs the current equilibrium of demand and supply of
commodities and services in the economy due to a reduction in demand. Less demand followed by less
productivity affects the selling prices of goods and services, the rate of employment in the country, the
pattern of consumption, the real wage rate, interest rates, the investment part and the rate of economic
inflation (Loungani, 1986). Figure 1 presents percentage change in oil price and unemployment rate of
India for a period of 30 years (1991–2020).
Oil Prices and Gross Domestic Product
Gross domestic product is termed as the monetary value of all finished products and services produced
over a particular time within a country. GDP offers a country’s economic snapshot and is used to measure

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Unemployment rate% Curde oil prcies in US$

Figure 1. Percentage Change in Unemployment and Oil Prices.

Source: The authors.
Sharma and Shrivastava 5

the size of an economy and the pace of growth. After the oil price fluctuations in the 1970s, the link
between oil prices and global GDP growth has been focussed. There are strong economic reasons to
predict the inverse relationship between GDP and the price of oil. The Economic Survey 2018 reports
that every US$10 per barrel increase in the price of oil reduces growth by 0.2–0.3 percentage points.
Figure 2 presents the percentage change in oil price and GDP of India for a period of 30 years (1991–
2020). It also explains the inverse relationship between the two variables.
Oil Prices and Industrial Production
As the major contributors to GDP, most of the developed economies have an industrial sector; hence, we
have a good reason to establish a connection between industrialization and economic growth. Industrial
production in the country can be seen as supply side. The availability of industrial goods can be depressed
by rises in oil prices because they raise the cost of manufacturing and transporting industrial produces.
High oil prices will change the supply curve of products and services for which oil is an input in economic
terminology. Index of industrial production has been used as a measure of industrial output in the current
study. The Industrial Production Index (IIP) is an index that shows output growth rates over a stipulated
period of time in various industry groups within the economy. Figure 3 presents an inverse association
between the percentage change in oil prices and industry value-added.

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Unemployment rate% Curde oil prcies in US$

Figure 2. Percentage change in Oil Prices and GDP.

Source: The authors.

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Unemployment rate% Curde oil prcies in US$

Figure 3. Percentage change in industry value-added and oil prices.

Source: The authors.
6 Global Business Review

Oil Prices and Inflation

Inflation may be defined as a general rise in prices and a decline in the buying value of money. The
increasing prices of oil also affect the supply curve of various intermediate and finished goods (for
which, one of the inputs is oil). Fluctuations in oil price are usually followed by an upsurge in inflation
and shrinking economic growth (Hooker, 2002). In the economy, price levels (inflation/deflation or
stable prices) play an important role in determining purchasing power and the creation of capital in the
economy. Saghaian (2010) also confirmed the strong link between oil prices and prices of different
commodities. Finally, the burden of this increased price goes to the final consumer leading to decreased
purchasing power. In the present study, we have used CPI as a measure of inflation. CPI is a systematic
calculation used for calculating price increases in an economy; it is also called a basket of goods and
services and is indicative of consumption expenditure. Figure 4 shows the percentage change in inflation
and oil price over a period of 30 years. As per the literature available and Figure 4, we can see that a
positive link exists between oil prices and inflation.
Oil Prices and Exchange Rate
Exchange rate is also a major factor that contributes to a country’s economic growth. Economic growth
can be depressed by strong exchange rate and enhanced by weak exchange rate. This occurs because
exchange rate is directly related to the rise or decrease in the economy’s exports/imports. The oil price
shocks and exchange rate changes are also associated in any economic scenario. Exchange rate shock has
a momentous adverse influence on crude oil (Brahmasrene et al., 2014). This association may exist
because an increase in the price of imported goods and their transportation costs increases the demand
for foreign currency (the increase is price again associated with oil price). The decline in the price of oil
leads to a higher rupee value compared with US dollars. Therefore, the exchange rate between rupee and
US dollars is associated with fluctuations in the oil price. Figure 5 showing percentage change in
exchange rate and crude oil prices displays the inverse relationship between the variables.

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Unemployment rate% Curde oil prcies in US$

Figure 4. Percentage change in inflation and oil prices.

Source: The authors.
Sharma and Shrivastava 7

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Unemployment rate% Curde oil prcies in US$

Figure 5. Percentage change in exchange rate and oil prices.

Source: The authors.

Oil Prices and Stock Prices

The term ‘stock price’ refers to the current price traded on the market to buy a share of the stock. Stock
price is the product of the interaction between stock exchange traders, buyers and dealers. The stock
market would, generally speaking, represent the economic conditions of the economy. If an economy is
increasing, production will grow and improved profitability should be experienced by most businesses.
This increased profitability would also lead to a rise in share prices (i.e., stock prices) and, on the other
hand, a drop in stock prices would occur if profitability goes down. The depreciation of rupees has
reverberating effects on the Indian economy and even on the stock market. Indian stock markets are
under considerable pressure because of the rise in crude oil prices. Many Indian companies are reliant on
healthy crude oil prices. This includes businesses in the sectors of tyres, lubricants, shoes, packaging and
airlines. The productivity of these companies is adversely affected by the higher costs of output. This
may negatively affect stock prices in the short term. At the other hand, the country’s oil exploration
companies could profit from an upsurge in oil prices. Figure 6 presents the percentage change in stock
prices and oil prices over a period of 30 years.

Objectives of the Study

The present study intends to find out the linkages between crude oil prices and economic activities in the
Indian context. Variables such as GDP, industrial value-added, inflation, foreign exchange rates, stock
prices and unemployment have been considered to represent economic activity in the country. The
relationship between oil price and each macroeconomic variable has been calculated individually to find
out whether is a significant association exits between oil price and that variable. The time series data of
30 years (i.e., 1991–2020) of all the mentioned variables have been taken to check the short-run and
long-run association between oil price and each variable.
8 Global Business Review

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Unemployment rate% Curde oil prcies in US$

Figure 6. Percentage Change in stock prices and oil prices.

Source: The authors.

Data Description and Methodology

The Data
The data collected for this study contain the time series values of 30 years (annual data) starting from
1991 to 2020. The data on macroeconomic variables for current study have been collected from various
sources (The World Bank, CEIC database, Reserve bank of India, S&P BSE SENSEX). The data on
unemployment, GDP, industrial output and inflation have been taken from the official website of the
World Bank (World Bank data sources). The data on crude oil prices have been obtained from CEIC
Indian premium database. The data on exchange rate between Indian rupee and US dollars have been
taken from official website of Reserve Bank of India. And the S&P BSE stock price data have been
obtained from S&P BSE SENSEX official website. For numerical illustration purpose, we have coded
the variables as follows: crude oil prices in US dollars (Z), unemployment rate in percentage(V1), GDP
(V2), industrial output (V3), inflation (V4), exchange rate (V5) and stock market prices (V6). Our study
considers the long duration of about 30 years from 1991 to 2020 to fulfil the purpose of testing the short-
run as well as the long-run association among the variables considered. Owing to liberalization,
privatization and globalization in 1991, during this time, the macroeconomic activity also took a pace in
shaping the viewpoint so the aforesaid during was considered relevant to conduct the study.
Though the data for current study come from different sources, for better analysis and symmetric
numerical analysis, all the values have been converted into their natural logarithm. The association
between dependent and independent variables can be easily captured by comparability of trend (increase
or decrease) in the indices of time series considered for the study.

Methodology (Econometric Methods)

To determine the long-term relationships between macroeconomic variables and the oil price fluctuation,
we have used Johansen cointegration test (long-run analysis) (Engle & Granger, 1987; Nkoro & Uko,
Sharma and Shrivastava 9

2016). If the cointegration is found among the variables, it means the variables have long-run association
among them. Johansen cointegration test was used to find the number of associations and also as a tool
to approximate those relationships (Poh & Tan, 1997). To find out the short-run relationship, we have
used Granger causality test. If there is cointegration among variables, then we apply Granger causality
test to check the short-run association among the variables (Granger, 1986). Vector autoregressive
techniques provide better non-stationarity tunings and establish long-term associations between factors
(Crane & Nourzad, 1998; Schmidt, 2000).
The confirmation of causality concludes the short-run relation among variables. The Granger
causality test assumes that for the estimation of these variables, the time series data of the given
variables provide the relevant details. Diebold (1998), in his study, explained the concept of predictive
causality. He exclaimed that for the prediction of yj, yi has all the relevant information. Prediction of yj
also requires the historical values of related variables. The test to verify the causality between two
variables includes estimating the following pair of regressions:

X t   i  0 iYt 1   j 1 j X t  j  u1t (1)

n n

Yt   i  0iYt 1   j 1 j X t  j  u2t (2)

n n

where u1t and u2t (the perturbations) are uncorrelated. Equation (1) states that X is dependent on the
past values of X and Y and Equation (2) postulates the same for Y. Unidirectional causality from X to Y
is shown if the assessed coefficient on Y (=1) lagged values is statistically different from zero as a group
(i.e., Σαi ≠ 0) and the estimated coefficient set on the lagged X (=2) is not significantly different from
zero (i.e., Σδj = 0). On the other hand, unidirectional causality from Y to X can be seen when the set of
lagged Y coefficient in Equation (1) is not statistically different from 0 (i.e., Σαi = 0) and the set of lagged
X coefficient in Equation 2 is different from zero (i.e., Σδj ≠ 0). Bilateral causality is assumed when the
sets of X and Y variables in each of the above regression equations are statistically significantly different
from zero.

Empirical Results

Unit of Variables (with Reference to Indian Context)

The following variables are considered to develop the empirical model:

1. Crude oil prices in US dollars (Z): in the current study, spot price of a barrel has been given in in
US dollars.
2. Unemployment rate in percentage (V1): unemployed percentage of people >15 years (% of
total population).
3. Gross domestic product (GDP) (V2): GDP at factor cost in US$ million.
4. Industrial output (V3): industrial output growth rate (base year 2011–2012).
5. Inflation (V4): CPI index presenting 299 items (base year 2011–2012).
6. Exchange rate (V5): rate of exchange between Indian rupee and US dollars.
7. Stock market prices (V6): S&P BSE SENSEX annual prices.
10 Global Business Review

Descriptive Statistics
In this section, we have provided the data analysis results of the proposed work. Table 1 depicts the
descriptive statistics and Table 2 displays the coefficients of correlation among the macroeconomic
variables. Table 3 presents the results of the unit root test at a level, while Table 4 presents the unit root
test results at second differencing. Figures 7–13 show the trend plots of time-series’ at the level (without
differencing). Both unit root test results and figures designate that the taken series are not stationary at
level. The unit test results in Table 2 have been obtained at second differencing of all the series, which
indicates that the taken series are integrated at order 2.

Table 1. Descriptive Statistics.

Variable Source: Minimum Maximum Mean Std. Deviation
Z 97.170 12.280 109.450 48.505 31.179
V1 0.539 5.281 5.820 5.588 0.127
V2 2714.895 270.105 2985.000 1214.358 901.065
V3 4.734 26.402 31.136 28.287 1.590
V4 11.379 2.491 13.870 7.151 3.300
V5 46.726 24.474 71.200 48.411 13.226
V6 39344.890 1908.850 41253.740 14251.851 12186.447
Source: The authors.
Note: Valid N (list-wise) = 30 and N = 30.

Table 2. Correlation Statistics.

V1 V2 Z V3 V4 V5 V6
V1 1
V2 −0.094 1
Z −0.186 0.659 1
V3 −0.170 0.187 0.606 1
V4 −0.127 −0.313 0.035 0.145 1
V5 0.055 0.910 0.559 0.029 −0.498 1
V6 −0.13746 0.9800 0.5993 0.185 −0.334 0.871 1
Source: The authors.

Table 3. Unit Root Test Results (at level).

ADF PP KPSS
Variable Test Statistic p-Value Test Statistic p-Value Test Statistic p-Value
Z −1.399 0.803 −6.499 0.712 0.843 0.01
V1 −2.917 0.221 −14.082 0.210 0.147 0.01
V2 −2.278 0.465 −6.894 0.686 1.055 0.01
V3 −3.550 0.055 −6.725 0.697 0.273 0.01
(Table 3 Continued)
Sharma and Shrivastava 11

(Table 3 Continued)

ADF PP KPSS
Variable Test Statistic p-Value Test Statistic p-Value Test Statistic p-Value
V4 −1.939 0.596 −10.359 0.456 0.221 0.01
V5 −2.541 0.365 −11.736 0.365 0.955 0.01
V6 −2.580 0.350 −15.68 0.104 1.038 0.01
Source: The authors.

Table 4. Unit Root Test Results (second differencing).

ADF PP KPSS
Variable Test Statistic p-Value Z-alpha p-Value Test Statistic p-Value
Z −4.256 0.014 −27.136 0.01 0.060 0.1
V1 −3.943 0.025 −27.136 0.01 0.198 0.1
V2 −4.509 0.01 −33.263 0.01 0.071 0.1
V3 −3.591 0.051 −46.163 0.01 0.188 0.1
V4 −5.588 0.01 −39.263 0.01 0.078 0.1
V5 −4.443 0.01 −34.483 0.01 0.163 0.1
V6 −5.568 0.01 −35.101 0.01 0.075 0.1
Source: The authors.

Figure 7. Unemployment Rate.

Source: The authors.

Figure 8. GDP (in US$ billion).

Source: The authors.
12 Global Business Review

Figure 9. Crude Oil Prices (in US$).

Source: The authors.

Figure 10. Industry Value-added.

Source: The authors.

Figure 11. Inflation (consumer prices—annual %).

Source: The authors.
Sharma and Shrivastava 13

Figure 12. Exchange Rate.

Source: The authors.

Figure 13. BSE Closing Prices.

Source: The authors.

The Empirical Model

Cointegration Test (Long-run Analysis)
The results of the cointegration test have been reported in Table 5. As per the results from Table 5, there
can be three cointegration equations. Since cointegration exists in the variables, VECM was applied to
confirm the short- and long-run causalities among the variables. The results of VECM have been reported
in Table A2. As per the results of VECM, there exists a significant long-run relationship (1% level of
significance) between crude oil prices and inflation (CPI). The long-run association between industrial
production and oil prices (significant at 5%) also can be exacted based on results. A long-run association
exits between oil prices and unemployment . As per the results of the Granger causality test, the short-run
association among variables has already been confirmed.

Table 5. Test Results (Johansen cointegration).

Trace Statistic Maximal Eigenvalue Statistic
Cointegration Eigen Values Critical Value Critical Value
Equations (lambda) Test Statistic (5%) Test Statistic (5%)
r=0 9.852086e-01 270.09 131.70 105.34 46.45
r≤1 9.324850e-01 164.74 102.14 67.39 40.30
r≤2 8.370784e-01 97.36 76.07 45.36 34.40
(Table 5 Continued)
14 Global Business Review

(Table 5 Continued)

Trace Statistic Maximal Eigenvalue Statistic

Cointegration Eigen Values Critical Value Critical Value
Equations (lambda) Test Statistic (5%) Test Statistic (5%)
r≤3 6.264420e-01 52.00 53.12 24.62 28.14
r≤4 4.329765e-01 27.38 34.91 14.18 22.00
r≤5 2.818419e-01 13.20 19.96 8.28 15.67
r≤6 1.786294e-01 4.92 9.24 4.92 9.24
Source: The authors.

Measuring Causality (Short-run Analysis)

Table 6 shows the results of the Granger causality test. All variables with oil prices are considered to
have bidirectional causality. From the results of Granger causality, the bidirectional causality between
crude oil prices and unemployment can be noticed. Though unemployment cannot be a cause for change
in oil prices due to the form of data set here, we can see the causality flowing from unemployment to oil
prices. Barsky and Kilian (2004) have also suggested that oil prices can have a reverse association with
macroeconomic and financial variables. Further, the path of causality varies from oil prices to GDP; it is
also possible to consider the direction of causality from GDP to crude oil prices (in yearly lag 2). Again,
there is the bidirectional causality between the oil prices and the added value of the industry. This can be
assumed because the increase in the price of oil can cause inflationary push which may increase industry
value-added, while the increasing demand for oil due to increased industrial production and no
information on increased supply can cause an increase in oil prices. There is a bidirectional relationship
between inflation and crude oil prices though the direction of causality from inflation to oil prices is
weak. Based on the findings, bidirectional causality varies from the price of crude oil to the exchange
rate, and a poor causality can again be observed from the exchange rate to the price of crude oil (at yearly
lag 2). Other results infer the existence of a bidirectional causality between the price of crude oil and the

Table 6. Results (Granger causality).

Direction of Causality F-statistic Years of Lags Probability Existence of Causality
Z → V1 0.031 1 0.862 Yes
V1 → Z 1.326 1 0.261 Yes
Z → V2 2.720 1 0.112 Yes
V2 → Z 2.262 2 0.130 Yes
Z → V3 0.941 1 0.342 Yes
V3 → Z 0.743 1 0.397 Yes
Z → V4 0.333 1 0.569 Yes
V4 → Z 0.202 1 0.657 Yes
Z → V5 2.504 1 0.127 Yes
V5 → Z 1.594 2 0.228 Yes
Z → V6 1.177 1 0.289 Yes
V6 → Z 1.413 2 0.267 Yes
Source: The authors.
Sharma and Shrivastava 15

stock prices (S&P BSE SENSEX). The causality from stock prices to oil prices is identified at lag order 2.
The result confirms a very weak causality running from stock prices to crude oil prices. Hence, in the Indian
context, the short-term association between oil prices and macroeconomic activities can be identified.

Conclusion and Future Research Directions

The current study contributes to the existing literature by investigating and establishing the connection
between oil price variations and the macroeconomic variables considered in the Indian context. The
readings of the Granger causality test have successfully concluded the bidirectional short-run causation
between oil price and macroeconomic variables. Thus, the results also contribute to the existing literature
about the long-run association in oil prices and macroeconomic variables in different countries. The role
of oil and gas as commodities in global trade, the position of oil prices in the macro economy and the
influence of oil and gas geopolitics are seen as very important. India produces a very small quantity of
crude oil and the balance has to be administered through imports from the oil-producing countries. Thus,
increasing the volume of imports affects the exchange rate. While reviving economic growth, it can be
inferred that cheaper crude reduces India’s foreign currency outflow and inflationary forces. The lower
rates lessen stress on inflation and interest rates and revive economic growth in the economy. The finding
of the study includes bidirectional causality between oil prices and other macroeconomic variables
considered for the study, while a long association exists with inflation, industrial production and
unemployment. Figure A1 indicates the potential existence of co-trending and co-movements among the
variables; however, three of our time series are moving simultaneously, and a little deviation can be
noticed about other series. As per the trend plot, the co-movement of oil is closer to GDP, unemployment
and stock price, whilst it is having matching trends with other series (series in their natural logs). The
VECM results also disclose the long-term relationship among other variables as well. There is ample
space of prospective work in the arena of impact and association of other oil and petroleum products for
reviewing their distribution and promotion, infrastructure development and oil field production,
petroleum products taxation, volatility in oil prices with policy references for maintaining sufficient
level of consumption and conservation.
There is a potential scope for finding out the relationship between oil and some other macroeconomic
variables (the variable other than the current research). Further research can be conducted covering the
areas of taxes, duties, government revenues arising from crude oil and other petroleum products.

Threats to Validity
The current research is relevant only in the Indian context and for the current data set. Our study is
limited to the impact of Z on V1, V2, …, V6 and assumed the other variables as constant. It is possible
that across different countries, the relation among variables varies depending on the form, property and
length of the data used for the analysis. The research study is limited to the economic effects of crude oil
prices, and it does not cover the areas of taxes, duties, government revenues arising from crude oil and
other petroleum products. The direction and magnitude of relationship among variables can be diverse
in developed, developing and under developing economies due to different phases of economic activities.
India is a developing economy where this relationship between oil price and other macroeconomic
variables can be different due to its own process of economic change and fiscal and monetary policies.
16 Global Business Review

Managerial Implications
The present study is useful for policymakers to effectively prepare and execute various policies in
different sectors if there is a fluctuation in the economy’s oil prices. Various policy fields include pricing
policies, employment policies and international trade policies as indirectly affected by fluctuations in oil
prices. In addition, our study describes that fund managers and individual investors should consider the
volatility of the oil price when making investment decisions. Oil prices in industrial sectors make raw
materials, intermediate goods and final products expensive than earlier; hence, the results of this research
article can also be helpful to industrial managers in framing policies to reduce this cost and revise prices
as needed. Our study will help corporate managers and decision-makers in government to understand the
impact of change in oil price on related variables which in turn will allow them to make strategic
decisions for future.

Appendix A

Table A1. Definition of Variables.

Variable Coding Source Definition
Crude oil Z https://www. The price of crude oil refers to the spot price of a barrel as the crude
prices ceicdata.com/ oil standard. The current study uses crude oil prices of Brent, since it
en/indicator/ typically remains the benchmark for other crude oils.
india/crude-
oil-production
Unem- V1 World bank The unemployment rate reflects the proportion of the jobless popula-
ployment data source tion. It is a lagging measure, which means it normally rises or falls in the
rate wake of shifting economic conditions. The current study talks about
change in unemployment due to change in crude oil prices.
Gross V2 World bank Gross domestic product is the overall monetary value of the goods and
domestic data source services produced within a country’s geographical borders over a given
product period of time, usually 1 year. The rate of GDP growth is a significant
indicator of a country’s economic success.
Industrial V3 World bank Industrial Production Index (IIP)has been used as a measure of in-
output data source dustrial output in the current study. IIP is an index that shows output
growth rates over a stipulated period of time in various industry groups
within the economy.
Inflation V4 World bank Inflation may be defined as a general rise in prices and a decline in
data source the buying value of money. In present study, we have used consumer
price index as a measure of inflation. A systematic calculation used for
calculating price increases in an economy’s consumer price index is
called a basket of goods and services, and it is indicative of consumption
expenditure.
Exchange V5 Official web- An exchange rate may be termed as the rate at which one currency will
rate site of RBI be exchanged for another. The current study employs the exchange rate
between Indian rupee and US dollars.
Stock mar- V6 S&P BSE The term stock price refers to the current price traded on the market
ket prices SENSEX of- for a share stock. The stock price is the product of the interaction
ficial website between stock exchange traders, buyers and dealers.
Source: The authors.
Table A2. Results of Vector Error Correction Model.
V1 V2 Z V3 V4 V5 V6
ECM1 −0.7845(0.5635) 3.2531(1.5510). 20.2060(7.2113)* −0.1434(0.7006) −17.8368(3.3672)** −3.6161(1.9041) 8.0958(10.7294)
ECM2 −0.9278(0.5499) −2.2871(1.5135) 1.8564(7.0371) −1.6042(0.6836). 9.0795(3.2859)* 3.1531(1.8581) −2.8689(10.4703)
ECM3 0.0151(0.0458) −0.2741(0.1259). −1.4476(0.5855)* −0.0620(0.0569) 0.8521(0.2734)* 0.2758(0.1546) −0.1354(0.8712)
Intercept 5.7e-05(0.0024) 0.0016(0.0066) 0.0169(0.0306) 0.0015(0.0030) −0.0133(0.0143) −0.0020(0.0081) 0.0043(0.0455)
ddiffun −1 −0.0741(0.7051) −1.7690(1.9406) 4.5030(9.0227) −1.3391(0.8765) −3.3442(4.2131) 3.6624(2.3824) 4.3905(13.4247)
ddiffg −1 0.3378(0.2478) 0.1703(0.6819) −0.9147(3.1705) 0.4824(0.3080) −9.3453(1.4804)*** −1.0857(0.8372) 2.1190(4.7173)
ddiffcr −1 0.0162(0.0488) 0.2044(0.1344) 1.0200(0.6250) 0.0670(0.0607) −1.4295(0.2919)** −0.2352(0.1650) 0.4198(0.9300)
ddiffi −1 −0.1048(0.6537) −2.3638(1.7993) −21.2170(8.3658)* −1.3207(0.8127) 20.3013(3.9063)** 2.5387(2.2089) −10.3198(12.4472)
ddiffin −1 −0.0201(0.0456) −0.1112(0.1255) 0.6360(0.5836) −0.0869(0.0567) −0.4835(0.2725) 0.2247(0.1541 0.0873(0.8683)
ddiffex −1 0.4740(0.3328) 0.1334(0.9161) −7.8490(4.2592) 0.5571(0.4138) 0.5965(1.9888) −1.1314(1.1246) −0.9627(6.3371)
ddiffb −1 −0.0279(0.0520) −0.2645(0.1431) −1.0352(0.6652) −0.0678(0.0646) 1.2514(0.3106)** 0.3043(0.1757) −0.8294(0.9898)
ddiffun −2 0.2062(0.5002) 1.2466(1.3767) −15.5816(6.4008). 0.4478(0.6218) 20.8536(2.9888)*** −0.4889(1.6901) 1.6316(9.5235)
ddiffg −2 0.2783(0.2064) −0.0391(0.5681) 1.3812(2.6416) 0.1600(0.2566) −4.8475(1.2335)** −0.0826(0.6975) 3.2024(3.9303)
ddiffcr −2 0.0203(0.0356) 0.1581(0.0980) 0.1886(0.4554) 0.0753(0.0442) 0.0605(0.2127) −0.2112(0.1203) 0.2286(0.6776)
ddiffi −2 −0.2865(0.4709) −1.6864(1.2961) −8.9209(6.0259) −0.6793(0.5854) 8.3627(2.8137)* 1.7471(1.5911) −10.1477(8.9657)
ddiffin −2 −0.0089(0.0207) 0.0008(0.0570) 0.3169(0.2648) −0.0211(0.0257) 0.1052(0.1237) 0.0539(0.0699) 0.0088(0.3940)
ddiffex −2 0.1044(0.1715) 0.0937(0.4719 −1.6841(2.1941) −0.1881(0.2132) −4.7862(1.0245)** −0.3623(0.5793) 1.3455(3.2645)
ddiffb −2 −0.0513(0.0417) −0.1168(0.1148) 0.0455(0.5337) −0.1326(0.0519)* −0.5400(0.2492). 0.1912(0.1409) −0.4051(0.7941)
Source: The authors.
18 Global Business Review

Figure A1. Cointegration Plot of All Times Series.

Source: The authors.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

ORCID iDs
Preeti Sharma https://orcid.org/0000-0001-7758-9720
Avinash K. Shrivastava https://orcid.org/0000-0001-7794-7129

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