CHAPTER 1.

A. Question and Answer

Q1. Define Research? What are the characteristics of Research?
Ans: RESEARCH:
Research is a systematic investigation to search for new facts in any branch of knowledge.
Research helps to arrive at new conclusions. It enables us to find solutions to certain
problems. Research is often referred to as scientific inquiry into a specific problem or
solution. This is because the search for facts needs to be undertaken systematically and not
arbitrarily. The systematic approach to research enables the research to search for facts in a
rational manner to arrive at conclusions whereas the arbitrary approach attempts to find
solutions to problems based on ones belief and imagination.Research involves a planned
approach to unravel the mystery or unexplained. A Researcher has to plan his work in
advance so as to anticipate any obstacles in the course of research. Such a plan help the
researcher to take decisions relating to the sample size, the type of data to be collected, the
analytical tools to be applied etc. Hence the research design could be defined as the blue print
specifying every stage of action in course of research. The Research Design is the
arrangement of conditions for collection and analysis of data in a manner that aims to
combine relevance to the research purpose with economy in procedure.
Definition of Research: According to William C. Emory in his book Business Research Methods, Research is any
organized inquiry designed and carried out to provide information for solving a problem.
According to V. Clover and H. Balsley, Research is the process of systematically obtaining
accurate answers to significant and pertinent questions by use of scientific method for
gathering and interpreting information.

CHARACTERISTICS OF RESEARCH:
SCIENTIFIC METHOD
Research uses scientific method to find facts or to provide solutions to specific problems. The
researcher needs to follow a systematic procedure to conduct research. There is a set of
procedures that have been tested over a period of time and are suitable to use in research.
Each step in the research procedure must follow the other.
OBJECTIVE AND LOGICAL
The scientific research is objective and logical in nature. Research is based on valid
procedures and principles. There is a need to collect relevant, accurate and objective data to
investigate into the research problem.
APPLIED AND BASIC RESEARCH
Research is broadly classified into two groups: Applied Research
Basic Research
Applied Research is designed to solve practical problems of the modern world, rather than to
acquire knowledge. The goal of applied research is to improve the human condition.
Basic or fundamental Research is driven by a scientists curiosity or interest in a scientific
question. The main goal of basic research is to expand mans knowledge. There is no obvious
commercial value to discoveries that result from basic research.
EMPIRICAL NATURE OF RESEARCH
Research can be based on direct experience or observation by the research. Empirical
Research is undertaken to study certain situations or event based on experiments,
observations and surveys.
GENERALISATION
Research findings can be applied to larger population. A researcher can conduct a research on
a sample of respondents that represent the universe. The sample selection must be done
systematically so that it properly represents the whole population or the universe.
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CONTROLLED NATURE OF BASIC RESEARCH

In real life experience there are many factors that affect the outcome. A single event is often
the result of several factors. When similar event is tested in research, due to the broader
nature of factors are taken as controlled factors while others are tested for possible effect.
DEVELOPMENT OF PRINCIPLES AND THEORIES
A systematic research helps to develop new principles and theories. Such principles and
theories can be useful to several organisations to manage and deal with people and things in a
better way.
MANIPULATION OF CONCEPTS
The researcher tries to manipulate things or concepts. The manipulation or purposeful control
of things or concepts is done with a definite purpose so as to arrive at statements of
generality.
MULTIPURPOSE ACTIVITY
Research is a multipurpose activity. It helps to discover new facts or verify old facts. It helps
not only to predict future events, but also may help to control such events. It establishes
casual relationship between variables.
QUANTITATIVE AND QUALITATITVE RESEARCH
Research undertaken to measure quantity or amount is called as quantitative research. On the
other hand, research which is undertaken to find out the quality of a particular situation or
phenomenon is called as qualitative research.

Q2. Explain need of Research in Business & Social Science?

Ans: NEED OF RESEARCH IN BUSINESS:
Business organizations can gain significantly with the help of research. The research and
development to develop new products, improve the design and quality of existing ones, and
to reduce costs.

PRODUCT AND DEVELOPMENT

Through marketing research, a business firm can identify the customer requirements, and
therefore it is possible to design new models or to modify existing products to satisfy the
customers.
REDUCTION IN COSTS
Research in business helps a firm to reduce costs. The research may indicate the areas where
high costs are involved. It may be possible for the firm to cut down the costs in certain areas.
CUSTOMER RELATIONSHIPS
Market research may help the firm to develop good relations with its customers, especially
the priority customers. Research can help the firm to collect valuable inputs about priorities
customers.
DEALER RELATIONSHIPS
Dealer relationships are vital for the survival and success of business organisation. Market
Research enables a business firm to main good relationships with dealers. Through research,
the firm can get feedback from dealers regarding their expectations.
CORPORATE IMAGE
Firms need to build, maintain, and enhance corporate image in the minds of stakeholders,
customers, dealers, employees.
NEED OF RESEARCH IN SOCIAL STUDIES:
Social sciences refer to business, commerce, demographic, psychology, and sociology.
Research in social sciences deal with the peoples behaviour in their different roles, such as
consumers, consultant, learners, leaders, teachers, trainers, employees, executive, producers,
parents, artists, advisors etc...
DEVELOPMENT OF METHODOLOGY
Development of Methodology to deal with social issues is one of the contributions of social
research. For instance, organisations face the problem of executive stress, lack of concern of
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ethics, poor leadership styles etc To overcome such problem, certain methodology needs to
be developed.
SOCIAL DEVELOPMENT
Social Research contributes to societal development. Social development can be measured in
terms of literacy, life expectancy, and other social development indicators. Research can be
taken for social development standards of the society.
SOCIAL WELFARE
Government organisations can undertake social research to enhance social welfare of the
society. Research can help to design suitable package of measures to reduce income
inequalities, to reduce poverty and unemployment and to overcome problems of social evils.
FORMULATION OF NEW THEORIES
Social Research helps formulate new theories. The existing theories can be re-evaluated and
modified with the help of social research.
ECONOMIC PLANNING
Social Planning can be immense use in economic planning in a given society. Economic
planning requires basic data on the various aspects of our society and economy, resource
endowment and the needs, hopes and problems of the people etc

Q3. Discuss different types of Research?

Ans: TYPES OF RESEARCH:
BASIC RESEARCH
It is also called pure or fundamental research. It is undertaken to develop a theory or a
body of knowledge. The main goal is to expand mans knowledge. There is no commercial
angle. It generates new ideas, principles and theories which may not be immediately utilized.

APPLIED RESEARCH
It is a scientific study designed to solve practical problems rather than merely acquiring
knowledge. It is used to find solutions to everyday problems and develop innovative
technologies.

DESCRIPTIVE RESEARCH
It is also known as Statistical research provides data about the population or universe being
studied. It is used when the objective is to provide a systematic description that is factual and
accurate as possible.
ANALYTICAL RESEARCH
It is undertaken to collect facts or data, or the facts and data that are readily available. The
researcher attempts to critically evaluate fact and data so as to arrive at conclusions
EMPIRICAL RESEARCH
It is defined as research based on experimentation or observation. It is a way of gaining
knowledge by means of direct and indirect observation or experience or experiment.
QUANTITATIVE RESEARCH
It is a method of inquiry employed in many disciplines, especially in social sciences.
Researchers aim to gather an in depth understanding of human behaviour and reasons that
govern the behaviour.
QUALITITATIVE RESEARCH
It is explaining phenomena by collecting numerical data that are analysed using
mathematically based methods. The objective is to develop and employ mathematical models,
theories and hypothesis pertaining to phenomena.

Q4. What is Research Methodology? What are requisite for Good Scientific Methods?
Ans: RESEARCH METHODOLOGY:
Methodology is the systematic analysis of methods applied to a field of study. It comprises
the theoretical analysis of the body of methods and principles associated with a branch of
knowledge.
Methodology does not set out to provide solutions. Therefore, it is not the same as method. It
offers the theoretical base for understanding which method, best methods that can be applied
to a specific case.
REQUISITE OF GOOD SCIENTIFIC METHOD:
CAREFUL LOGICAL ANALYSIS OF PROBLEM
UNEQUIVOCAL DEFINITION OF TERMS AND CONCEPTS
COLLECTION OF DATA PATIENT TO PROBLEM
CLASSIFICATION OF DATA
EXPRESSION OF DATA IN QUANTITATIVE TERM
RIGOROUS EXPERIMENT
SOUND & LOGICAL REASONING
EXACT CONCLUSION
COMPLETE ELIMINATION OF PERSONAL EQUATION
COMPREHENSIVE REPORT

Q5. Explain steps/process in Scientific Research?

Ans: STEPS/PROCESS IN SCIENTIFIC RESEARCH:
IDENTIFICATION AND SELECTION OF RESEARCH PROBLEM

It is the first and the most important step of research process. It is identification of a
destination before undertaking a journey. It is said that a problem half defined is a problem
half solved.
REVIEW OF LITERATURE
The researcher should undertake extensive literature survey relating to the problem. He may
consider various publications such as journals, books, reports and other published matter.
FORMULATION OF HYPOTHESIS
Researcher should formulate hypothesis. It is a tentative assumption made to test its logical or
empirical consequences.
RESEARCH DESIGN
The researcher must prepare a research design. It is a logical and systematic plan prepared for
conducting a research study. It can be called as a blue print for collection, measurement and
analysis of data.
DESIGNING THE QUESTIONNAIRE
If the researcher cannot solve the problem with the help of secondary data, observation and
experimentation, then he should make the effort to collect primary data from the field for
which he requires a questionnaire.
SAMPLING DESIGN
It is not possible to collect data from each member of the universe or people under study due
to time constraints. Therefore, the researcher needs to select a sample of respondents that
represent the universe.
COLLECTION OF DATA
Problem solving is essentially a process of collecting information. The data can be collected
from various sources i.e. primary and secondary data.
PROCESSING OF DATA
The data collected is mostly available in raw form and therefore, it needs to be processed. It
involves editing, coding, classification and tabulation.
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DATA ANALYSIS
Organisation of data is generally followed by its analysis and interpretation. The purpose of
analysing data is to establish relation between information and problem. Interpretation refers
to analysis and generalization of results. It enables to clear the meaning and implication of
study.
HYPOTHESIS TESTING
After analysis and interpretation of data, the researcher must be in a position to test the
hypothesis. The researcher should find out whether or not the research findings support the
hypothesis or prove to be contrary.
PREPERATION OF RESEARCH REPORT
The research findings and conclusions are presented with the help of research report. It is
divided into: Preliminary Contents
Main Body
Conclusion Part
FOLLOW UP REPORT
The researcher should submit the report to concerned authorities. A business research report
should be submitted to guide for approval and then to the concerned university.

Q6. Write a note on Review of Literature?

Ans: REVIEW OF LITERATURE:
Review of Literature is an important stage in research activity. It refers to extensive review of
literature relating to research problem which the researcher intends to undertake. The
researcher reviews previous research studies, relevant reference books, articles in specific
journals and other published sources. Such Review of Literature provides a good insight into
the research problem.

The researcher gets familiar with all previous research studies undertaken by other
researchers which are relevant to the research project. The research scholar reviews the
findings of previous research studies. He evaluates the conclusion drawn from the research
findings. He also analysis the impact of recommendations made by other researchers.
Literature Review can be conducted throughout the research activity. It starts with
identification and selection of the activity. It continues throughout the various stages of
research process and ends with the writing of research report. Review of Literature helps to
identify the concepts relating to the research topic and potential relationship between them. It
also helps in appropriate analysis of data. Moreover it gives broader vision and even the
secondary data to the research. Following literature is carefully reviewed and studied by the
researcher. A literature review is a form of research report, where the data are the readings
that have been located and the major part of the report is the analysis of that data. And this
is perhaps the heart of the matter analytical insight. A review must not simply describe or
summarise the literature, a review must critically assess that literature.
A literature review is an evaluative report of studies found in the literature related to your
selected area. The review should describe, summarize, evaluate and clarify this literature. It
should give a theoretical basis for the research and help you determine the nature of your own
research. Select a limited number of works that are central to your area rather than trying to
collect a large number of works that are not as closely connected to your topic area.
A literature review goes beyond the search for information and includes the identification and
articulation of relationships between the literature and your field of research. While the form
of the literature review may vary with different types of studies, the basic purposes remain
constant:
Provide a context for the research
Justify the research
Ensure the research hasn't been done before (or that it is not just a "replication study")
Show where the research fits into the existing body of knowledge
Enable the researcher to learn from previous theory on the subject
Illustrate how the subject has been studied previously
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 Highlight flaws in previous research

Outline gaps in previous research
Show that the work is adding to the understanding and knowledge of the field
Help refine, refocus or even change the topic

Q7. What is Research Design? What are its essentials?

Ans: RESEARCH DESIGN:
According to David & Nachmias, Research Design actually constitutes the blue print for the
collection, measurement and analysis of the data.
According to John W. Best, Research Design is the plan, structure, strategy and means of
investigation conceived so as to obtain answers of research questions. It is a plan or an
overall scheme or a programme of research.
The Research Design is the ground plan for conducting the research investigation. It provides
guidelines to researcher to help him keep track of his actions and to know he is moving in the
right direction in collecting data.
ESSENTIALS OF GOOD RESEARCH DESIGN:
FOCUS ON OBJECTIVES
The research design must focus on its objectives. The objectives must be very clear to the
researcher as well as to the researcher staff. The objectives differ depending on the type of the
research.
FLEXIBILITY
The research design should not be rigid. It must be flexible depending upon the situation.
PILOT STUDY
It is always advisable to conduct a pilot study for finalizing the research design. Pilot study is
a research activity undertaken for small segment of research universe. It is conducted to find

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out whether or not the researcher would be in a position to collect relevant data from it
sources, or whether or not the data would be relevant to solve the problem.
ACCEPTANCE
The research design should be acceptable to the persons concerned. In case of commercial
research, the research design should be acceptable to the higher authorities. In case of
academic research, the research should be acceptable to the research guide. In case of social
research, the research design should be acceptable social and other organisations that are
going to finance or sponsor the research activity.
SUITABILITY
The research design must be suitable to achieve research objectives. Certain factors are
considered while finalizing the research designs such as availability of funds, time,
manpower etc.

SIMPLICITY
The research design should be simple and easy to understand. The language used should be
clear and simple. The research design must be supported by footnotes. Technical jargons must
be avoided.
COST EFFECTIVE
The research design should be cost effective. In a commercial research, the research work
based on research design must bring benefits to the organisation. The research design should
enable proper collection and analysis of data which in turn should facilitate proper decision
making.
EASE IN IMPLEMENTATION
The research design should facilitate proper implementation of the research activity. The
research design should avoid complicated procedures and techniques which are difficult to
follow.
TRAINING TO RESEARCH STAFF

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To conduct effective research proper training must be given to the research staff. Training
helps to improve knowledge, attitude, skills, and social behaviour.

Q8. Explain different types of Research Design?

Ans: TYPES OF RESEARCH DESIGN:
EXPLORATORY RESEARCH
CONCLUSIVE RESEARCH
EXPLORATORY RESEARCH:
It is conducted to explore information about the nature or cause of research problem. It is
conducted when the causes of the research problem are not known to the researcher.
Management may conduct exploratory research to find out the causes of declining sales in the
past few months. They may be declined due to certain number of factors such as : problem in
quality of product , increase in competition, ineffective promotion mix, poor management of
channels of distribution , incompetence of sales, force etc.
Exploratory research can be conducted for following purposes such as, to define the problem
more clearly, to develop hypothesis, to identify alternate courses of action, to isolate key
variables and to develop relationships among the variables for further examination or to
establish priorities for further research etc.
Exploratory researches have certain uses such as, background information, development of
hypothesis and research priorities.
Methods used in exploratory research are: Secondary data Analysis
Experience Surveys
Case Analysis
Focus Groups and,
Projective Techniques
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DESCRIPTIVE RESEARCH
It is conducted to obtain descriptive information about central aspects of a problem. For
instance, a researcher may like to know detailed information about students appearing for
their TY. BCOM exams of N.M College in respect of age, income, gender, occupation etc. it
may be undertaken for commercial purposes.
Through descriptive research it would be difficult to answer the question why. In order to
answer the question why, a casual research is required.
There are two types of descriptive research:
Cross Sectional Studies
Longitudinal Studies

Q9. What is sampling? Explain essentials of good sampling?

Ans: SAMPLING
Sampling is a process used in statistical analysis in which a predetermined number of
observations are taken from a larger population. The methodology used to sample from a
larger population depends on the type of analysis being performed, but may include simple
random sampling or systematic sampling.
ESSENTIALS OF GOOD SAMPLING
1. Representative:
The sample should truly represent the characteristics of the verse. For this investigator should
be free from bias and the method of collection should be appropriate.
2. Adequacy:
The size of the sample should be adequate i.e., neither too large nor small but commensurate
with the size of the population.

3. Homogeneity:
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There should be homogeneity in the nature of all the units selected for the sample. If the units
of the sample are of heterogeneous character it will impossible to make a comparative study
with them.
4. Independent ability:
The method of selection of the sample should be such that the items of the sample are
selected in an independent manner. This means that lection of one item should not influence
the selection of another item in any manner d that each item should be selected on the basis of
its own merit.
Q10. Explain different techniques and methods of Good Sampling?
Ans: SAMPLING METHODS
There are two types of sampling methods: Probability Methods
Non- Probability Methods
PROBABILITY METHODS
It is also known as random sampling. Probability means possible chance. Therefore, each
element of the population has known chance or opportunity of being selected or included in
the sample.
The following are the types of probability methods: Simple Random Sampling
This is the most popular method which is normally followed to collect data. The technique
provides every element or unit an equal chance of being selected in the sample.
Systematic Sampling
It is a variation of simple random method. This technique is superior to simple random
method.
Cluster Sampling

15

It is also called as Area Sampling. In this method, instead of selecting individual units,
researcher divides the population into clusters or groups and accordingly sample is selected.
Stratified Sampling
The population is divided into various strata or segments based on income, occupation, age,
religion, gender etc.

NON PROBABILITY METHODS

The following are the types of non-probability methods: Convenience Sampling
The sample is selected as per the convenience of the researcher. Every element of the
population does not get a chance of being selected. The researcher may consider factors to
select the sample of respondents.
Accidental Sampling
The researcher may select the sample by chance without following a systematic procedure.
Every element of the universe does not get the chance of getting selected.
Judgement Sampling
Sample is selected on the basis of judgment of the researcher or some other person assisting
or advising the researcher.
Quota Sampling
The researcher allocates certain quota to certain groups under study. The quotas differ from
each area depending upon factors such as age, occupation, income etc.
Sequential Sampling
It is a non-probability sampling technique wherein the researchers pick a single or a group of
subjects in a given time interval, conducts his study, analyzes the results then picks another
group of subjects if needed and so on.
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Snowball Sampling
It is a non-probability sampling technique that is used by researchers to identify potential
subjects in studies where subjects are hard to locate.

Q11. What is Secondary Data? Explain its limitations?

Ans: SECONDARY DATA
Secondary data is readily available data from public printed sources. It is generally used in
the case of academic research and to certain extent in the case of research. However,
commercial research requires more of printing data as compared to secondary data.
The researcher makes first attempts to obtain information from secondary sources to solve the
problem. However, when secondary data is insufficient and outdated, the researcher resorts to
primary data.
LIMITATIONS OF SECONDARY DATA
PROBLEM OF ACCURACY
The quality of secondary data is affected due to problem of accuracy. One cannot be certain
of the genuineness of data. The records may not be well maintained or organised. Therefore
one must be cautious in using secondary data.
PROBLEM OF RELIABILITY
The secondary data lacks reliability. The data may be outdated; therefore it may not serve the
purpose of the current research work undertaken by the researcher. Some sources provide
unreliable and biased data.
PROBLEM OF ADEQUACY
At times, secondary data will be accurate and reliable, but the data may be insufficient to
solve the current research problem. It may not provide complete data to solve the problem.
LACK OF IN DEPTH INFORMATION

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Secondary data may not lack adequacy, but it may not provide in-depth information to solve
the research problem. For instance, commercial research requires in depth knowledge of
consumer behaviour which can be obtained more through in depth questioning of the target
respondents.
PROBLEM OF QUALITY DECISION MAKING
The secondary data may affect the quality of decision making. This is because the data may
be inaccurate, insufficient and unreliable. Therefore the decisions made are purely on the
basis of secondary data would bring poor outcomes. To improve the quality of decisions, one
may require primary data as it is first hand information and more reliable and accurate.
PROBLEM OF SPECIFIC DATA
The secondary data may be more general in nature rather than specific. The researcher needs
specific data to solve specific problems. Therefore, the researcher cannot depend merely on
secondary data, but instead collect specific data to resolve the specific problem.
UNSUITABILITY
The secondary data may not be suitable in certain cases. Secondary data may be of less use
in case of commercial research. To solve business related problems, a researcher may require
more of primary data rather than secondary data.
PROBLEM OF BIASED INFORMATION
There is possibility of bias in secondary data. The researcher has no control over the quality
of secondary data. The secondary data may be badly influenced by the bias of the respondents
and also that of the researcher. The researcher may have casually collected the secondary data
and got it published. Therefore, one should not blindly depend on secondary data.

Q12. Explain different methods of collecting Primary Data?

Ans: METHODS OF COLLECTING PRIMARY DATA: SRURVEY/INTERVIEW METHOD
OBSERVATION METHOD
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EXPERIMENTAL METHOD

SURVEY/INTERVIEW METHOD:
The survey can be census survey or sample survey. In case of survey, the entire universe is
contacted to collect data.
Under the survey method, the data is collected through interviews. The interviews can be
either personal, telephone or mail survey.
Personal Interview: Its a face to face interaction between interviewer and respondent. The
interviewer might ask questions and respondents answer accordingly. It can be formal or
informal, structured or unstructured, individual or group, general or specific, directive and
non-directive.
Telephone interview: It is a method of conducting interview by telephoning the respondents.
A series of questions are asked on the phone and the answers of respondents are recorded.
Mail survey: It is another method of data collection. A questionnaire is prepared containing a
list of questions to solicit information from selected respondents. This questionnaire is sent
through post or advertised in a newspaper or magazine, explaining the purpose of the
questionnaire and request to complete and return it to the researcher.
OBSERVATION METHOD:
The researcher obtains information of the subjects under study with the help of observation
rather than by the way of interviewing. For instance, a researcher studying customer buying
behaviour at shopping malls, then we would visit the shopping malls and observe the
behaviour of the customers.
EXPERIMENTAL METHOD:

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The experimental method is mostly used in the case of scientific research study. With the help
of experimentation, the researcher may like to study the cause-effect relationship between
two or more variables. It can be used in development of a new project. INTRODUCTION

TO CORE TOPIC:
The recent rise in the prices of crude oil has drawn everyones attention towards the crucial
role that oil plays in the economy of any nation. Crude oil is one of the most necessitated
commodities in the world and India imports around 100 million tons of crude oil and other
petroleum products. This in turn, results in spending huge amounts of foreign exchange. The
increasing quantum of imports of petroleum products has a significant impact on the Indian
economy, especially when crude oil prices are shooting up globally. Crude oil not only serves
as a source of energy but also as a major raw material to various industries. With no major
discoveries in the recent years, the increasing costs of production have pushed up crude oil
prices globally. Also, the high volatility in the prices of oil breaching the $100/barrel mark
and rising to a high of $147/barrel could be attributed to the fact that in the recent years,
many index funds have taken positions in commodities considering oil to be an asset stock in
their portfolios. It has been usually observed that in India, the pricing scheme is designed in
such a way that it offers a system to moderate the soaring international oil prices and thereby
study the impact on growth, inflation, etc. In spite of the global economy being affected due
to the European debt crisis, crude oil prices are soaring against a backdrop of increasing
tensions around the situation in Iran. The price of Brent crude has gone beyond $120 per
barrel. This spike in crude oil price significantly increases the energy costs of every country
and becomes a major concern in the fragile global economy. The impact of rising oil prices
on the economy differs from country to country depending upon individual energy supply and
demand structures. Countries that could be adversely affected by the increase in crude oil
price are usually characterized by high net imports of oil per GDP. Traditionally, the non-oil
producing developing countries fall under this category. Against this background, developed
countries are more economical in their usage of oil and therefore, see an easing of this
adverse effect of rise in crude oil prices. This phenomena has led to many European
developed countries enjoying a significant inflow of oil money. Today, we may find a
negative impact of rise in crude oil prices. A steep fall in the current accounts leads to further
worsening of the treasury budgets, which, in turn, will further worsen the balance between
savings and investments. Also, reducing tax revenues and other extraneous factors will
further deteriorate the treasury budgets. Due to the economic crisis in Europe, where the
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treasury budgets have shaken, there is a monumental imbalance between savings and
investments. These imbalances continue worsening because of rising crude oil prices, which
threaten to push the economy into much deeper crisis. When a country has a fixed nominal
exchange rate and there is also an output gap, increases in oil prices leads to an increase in
the general price levels. According to a RBI report (2005), for every unit dollar increase in
crude oil price, WPI inflation rises by 30 basis points. Kaushik Bhattacharya et al. (2005)
analysed the impact of increase in oil price on inflation. They studied the mechanism of
increase in the prices of petroleum products on the prices of other commodities and the
output in India. In February 1999, from an all time low of 11 U.S Dollars per barrel, it
increased to a peak of 35 dollars in the first week of September 2000. Due to this, all oil
importing countries faced the threat of oil shock; India, being a major oil importer, was
particularly affected.
Energy is the prime mover of economic growth and is vital to the sustenance of a modern
economy. Future economic growth crucially depends on the long-term availability of energy
from sources that are affordable, accessible and environmentally friendly. Efficient, reliable
and competitively priced energy supplies are prerequisites for accelerating economic growth.
For any developing country, the strategy to obtain and meet the energy requirements and
energy developments are the integral part of the overall economic strategy. Efficient use of
resources and long-term sustainability in its utilization is of prime importance for economic
development. Sustainability would take into account not only available natural resources but
also to take care of the related ecological and social aspects to meet the priority needs of the
economy. Simultaneous and concurrent action is, therefore, necessary to ensure that the shortterm concerns do not detract the economy away from the long-term goals. Realisation of high
economic growth aspirations by the country in the coming decades, calls for rapid
development of the energy market. The energy resources available indigenously are limited
and may not be sufficient in the long run to sustain the process of economic development
translating into increased energy import dependence. The base of the countrys energy supply
system is tilted towards fossil fuels, which are finite. India meets nearly 35 per cent of its
total energy requirements through imports. With the increase in share of hydrocarbons in the
energy supply/use, this share of imported energy is expected to increase. The challenge,
therefore, is to secure adequate energy supplies at the least possible cost. Although growth of
the energy sector is moderate and has, to some extent, served the countrys social needs, it has
put tremendous pressure on the Governments budget. Energy is essential for living and vital
21

for development. Affordable energy directly contributes to reducing poverty, increasing

productivity and improving quality of life.

INDIAN SCENARIO :
1. Pre Independence period (1866-1947):
The exploration of hydrocarbon is commenced in 1866 when Mr.Goodenough of
McKoillop Stewart Co. drilled a well near Jaypore in upper Assam and struck oil.
Mr.Goodenough, however, failed to establish satisfactory production. By 1882 the Assam
Railway and Trading company (ARTC), a company registered in London in 1881, with an
objective to explore the rich natural resources of Upper Assam, acquired rights for
exploration over about 30 sq. miles in the same area. Sub-surface oil exploration activities
started in the dense jungles of Assam in North-East India. The first commercial discovery
of crude oil in the country was, however, made in 1889 at Digboi. In 1893, rights were
granted to the Assam Oil Syndicate which erected a small refinery at Margharita to refine
the oil produced at Margharita. A new company known as Assam Oil Company (AOC)
was formed in 1899 with a capital of 310,000 headquartered at Digboi to take over the
petroleum interests, including the Makum and Digboi concessions and the rights from
Assam Oil Syndicate. A 500 BPD refinery was set up in Digboi in 1901, supplanting the
earlier refinery at Margharita. In 1921, UK based Burmah Oil Company (BOC) which
had a successful oil exploration record in Burma, bought all the shares from ARTC and
was appointed commercial and technical managers of AOC. By 1931, crude oil
production has gone up to about 250,000 tonnes per annum and exploration activities
were spread all over the Assam-Arakan region. Meanwhile another field was discovered
at Badarpur in the Surma Valley and because the discovering party lacked the capabilities
to exploit the find, BOC provided technical know-how, financial backing and managerial
support.
2. Post-Independence Period (1947-1960):
After independence, the Government of India (GoI) realized the importance of oil and gas
for rapid industrial development and its strategic role in defense. Consequently, while
framing the industrial Policy Statement of 1948, the development of petroleum industry

22

in the country was given top priority. 49 While BOC and AOC continued development of
Digboi oil field and intensified exploration activities in the North-East region, the IndoStanvac Petroleum Project (a joint venture between GoI and Standard Vacuum Oil
Company of USA) was engaged in exploration work in West Bengal. In the year 1953,
the first oil discovery of independent India was made at Nahorkatiya near Digboi and then
in Moran in 1956. In 1955, GoI decided to develop the oil and natural gas resources in the
various regions of the country as a part of development of the Public Sector. With this
objective, and Oil and Natural Gas Directorate (ONGD) was set up towards the end of
1955, as a subordinate office under the then Ministry of Natural Resources and Scientific
Research. The department was constituted with a nucleus of geoscientists from the
Geological Survey of India (GSI). In April 1956, the GoI adopted the Industrial Policy
Resolution, which placed mineral oil industry among the schedule A industries, the
future development of which as to be the sole and exclusive responsibility of state. Soon,
after the formation of ONGD, it became apparent that it would not be possible for the
Directorate with its limited financial and administrative powers as subordinate office of
the Government to function efficiently. So in August, 1956, the Directorate was raised to
the status of a commission with enhanced powers, although it continued to be under the
government. ONGC started it systematic geo-scientific surveys in areas considered
prospective on the basis of global analogies. A thrust in exploration was concentrated
during the early years in the Himalayan Foothills and adjoining Ganga plains, in the
alluvial tracts of Gujarat, Upper Assam and Bengal Basin. Exploratory drilling was
initiated in the Himalayan Foothills in 1957 with drilling of the first well Jawalamukhi-1
in Himachal Pradesh. The year also saw drilling activities being taken up for the first time
in Cambay Basin which ultimately resulted in the discovery of oil and gas in 1958.
Meanwhile, Oil India Private Ltd. was incorporated on February 18, 1959 for the purpose
of development and production of the discovered prospects of Nahorkatiya and Moran
and to increase the pace of exploration in the North- 50 East India. It was registered as a
Rupee Company in which AOC/BOC owned two-thirds of the shares and the GoI, onethird. In October 1959, ONGC was converted into a statutory body by an act of the Indian
Parliament, which enhanced powers of the commission further. The main functions of
ONGC subject to the provision of the ACT, were to plan, promote, organize and
implement programmes for development of petroleum resources and the production and
sale of petroleum and petroleum products produced by it, and to perform such other
functions as the Central Government may, from time to time, assign to it.
23

3. Mixed Economy Period (1961-1991):

On July 27th 1961, the Government of India and BOC transformed OIL into a Joint
Venture Company (JVC) with equal partnership. ONGCs Geo-Scientific surveys and
exploratory drilling activities were also spread out to UP (1962), Bihar (1963), Tamil
Nadu (1964), Rajasthan (1964), J&K (1970),Kutch (1972), and Andhra Pradesh (1978).
In spite of limited success in these areas, ONGC pursued its exploratory efforts and was
successful in identifying hydrocarbons in Cauvery basin and Krishna Godavari basins in
the mid 1980s. Offshore exploration was initiated in 1962 through experimental seismic
surveys in the Gulf of Cambay. Detailed seismic surveys carried out in the western
offshore in 1972-73 resulted in the identification of a large structure in Bombay Offshore
which was taken up for drilling in 1974 leading to Indias biggest commercial discovery,
thereby establishing a new hydrocarbon province. Encouraged by the success at Bombay
Offshore, exploratory efforts were expended systematically in the entire Western Offshore
including Kerala Konkan basin and Eastern Offshore areas leading again to large
discoveries in the Western Offshore (Bassein and Neelam) and substantial accumulations
in the Eastern Offshore (Ravva, PY-3 etc.). ONGC went offshore in the early 1970 s and
discovered a giant oil field in the form of Bombay High, now known as Mumbai High.
This discovery, along with subsequent discoveries of huge oil and gas fields in Western
offshore changed the oil scenario of the country. Subsequently over 5 billion tonnes of
hydrocarbons were discovered. The most important contribution of ONGC, however, is
its self-reliance and 51 development of core competence in E&P activates at a globally
competitive level. ONGC went offshore in the early 1970s and discovered a giant oil
field in the form of Bombay High, now known as Mumbai High. This discovery, along
with subsequent discoveries of huge oil and gas fields in Western offshore changed the oil
scenario of the country. Subsequently over 5 billion tonnes of hydrocarbons were
discovered. The most important contribution of ONGC, however, is its self-reliance and
development of core competence in E&P activates at a globally competitive level. On
October, 14th, 1961, OIL became a wholly-owned GoI enterprise by taking over BOC s
50 per cent equity and the management of Digbol oilfields changed hands from the
erstwhile AOC to OIL. For the time PELs outside the North-East, were granted to OIL in
Offshore Orissa (Mahanadi) in 1978, in Mahanadi Onshore (1981), North-East Coast
Offshore (1983), Rajasthan (1983), Saurastra Offshore (1989) and Ganga Valley areas in
UP in 1990.
24

4. Economic Liberalization 1991:

The liberalized economic policy, adopted by the Government of India in July, 1991
sought to deregulate and de-license the core sectors (including petroleum sector) with
partial disinvestments of government equity in Public Sector Undertaking and other
measures. Following this, ONGC was re-organized in February 1994 as a limited
company under the companies Act.
5. Post Liberalization:
Several committees were set up to examine various proposals for restructuring and
devising strategies to meet the challenge of the new economic environment. Among the
most prominent report was the Sundarajan Committee Report in February 1995 which
favoured de-regulation of the petroleum industry at one stroke. However, the strategic
Planning group on Restructuring of the Indian Oil Industry, the R Group, headed by the
then Petroleum Secretary. Dr. Vijay Kelkar, felt the Switchover should be in a phased
manner. Commercial hydrocarbon discoveries were reported by OIL during 1990- 91 in
Assam and Rajasthan. During 1993 -1994 ONGCs production from western offshore
reached a low of 15.37 MMT, prompting ONGC to enter into 52 Joint Ventures for
developing Ravva, Mid & South Tapti, Mukta and Panna fields. The JV initiative was
fulfilled in as much as it increased the production from these declining fields by 5 MMT
in 1994-95; during the same period 5 important discoveries were made in the Bombay,
Krishna Godavari and Cauvery Basins. A committee was constituted in 1992 under the
chairmanship of P.K. Kaul former cabinet Secretary, to examine the need for restructuring
of ONGC. This Committee recommended setting up of a body, with the name and style of
the Director General of Hydrocarbons (DGH), for discharging the regulatory functions of
leasing and licensing, safety and environment as also development, conservation and
reservoir management of Hydrocarbon resources. Accordingly, DGH was set up by a
Government Resolution in April, 1993 through which certain advisory regulatory roles
were entrusted but no development role was assigned. OIL also went overseas and
acquired a 20 per cent participating interest in the production sharing contract for the
Block 4 in Oman through a farm in agreement with TOTAL FINA of France. It also
involved in the exploration service contract for the Farsi Block in Iran along with OVL
and Indian Oil Corporation Limited. In 1997 the GoI in order to accelerate pace of
exploration efforts in the country approved the New Exploration Licensing Policy
25

(NELP) by providing a number of attractive fiscal and contractual terms. The 9th rounds
of NELP have been concluded, out of the 254 blocks awarded under NELP 1-9 rounds, 54
blocks have been relinquished till date and balance of 181 blocks are active. 5.4.1. Crude
Oil and Natural Gas Production in India. The trend in production of crude oil and natural
gas during the period 2003-04 to 2010-11 is in Table-5.4.1 and Figure-5.4.1. The crude oil
production has remained in the range of 33 to 34 MMT during the period 2002-03 to
2009-10. However, during 2010-11 the production of crude oil increased from33.69
MMT during 2009-10 to 37.712 MMT due to production from Rajasthan oil fields.
Natural gas production increased substantially from 31.389 BCM in 2002-03 to 52.222
BCM in 2010-11, with some major discoveries by Pvt. /JVCs in Krishna 53 Godawari
deep water; there was an increase by 11.94% over the year 2009-10 in production of
crude oil in 2010-11. The Government of India launched the ninth bid round of New
Exploration Licensing Policy (NELP-IX) and fourth round of Coal Bed Methane Policy
(CBMIV) during October, 2010 to enhance the countrys energy security. In addition,
overseas oil and gas production in 2011-12 is likely to be about 7 MMT and 2 BCM per
annum respectively

26

HISTORY OF OIL PRICING:

Until the beginning of the 1970s energy and Oil market development was described by
the ascending branch with accelerated growth of Hubberts curve. Production growth was
based on the discovery of major new low-cost oil fields primarily in the Middle East. The
international market was closed to any outsiders; first split between the Seven Sisters
under the 1928 Achnacarry Agreement and by the end of the 1960s increasingly
dominated by OPEC, especially after re-nationalization of their resources in the mid1970s following the end of colonialism in the 1960s. However, the embargo in 1973 /
1974 and the oil price increases in 1973 /1974 and 1979 / 1980 triggered investment in oil
outside of OPEC, the development of new technologies, oil substitution by other energies
especially in power generation, more efficient energy use, and substitution of energy by
other productive resources, firstly by capital. This finally led to the decrease of absolute
volumes of world oil consumption in the early 1980s and to the oil price collapse in
1985 / 1986, to more competitive structures and finally to a liquid oil market. The
development of the oil market, its contractual structure and pricing mechanisms can be
divided in four major time-periods from a historical perspective. Different forms of
oligopolistic pricing dominated during the first three periods: prior to the 1970s, at the
first two stages it was the oligopoly of international oil companies (with the strong backup of their home states), at the third stage-it was the oligopoly of 13 major producer states
(OPEC). It was only 62 after the oil price collapse in 1986 that pricing set by an oligopoly
was substituted by exchange based pricing.

ROLE OF CRUDE OIL PRICE ON INDIAN ECONOMY:

Crude oil price is an important parameter for oil importing country like India; it has a
bearing on economy, because crude oil is the raw material for refinery. The domestic
27

production accounts for only 24 to 26% of total countrys crude oil demand; rest is to be
met by importing the crude. Indias huge dependence on imported crude oil makes it
vulnerable due to the shocks & disruptions in the Global Oil Market. Any sharp spike in
oil prices in the global market results in an unfavourable economic situation. The reasons
for the same are outlined below.

Rise in Cost of Imports: The first victim of rise in crude oil prices is the state
exchequer. Every increase of $1 per barrel in Indian crude basket prices pushes up
the annual oil import bill by $1.2 billion. The oil import bill of $140 billion is
faced by India in 2011-12.( Source: World Oil, August 2012/ vol.233 No.8, p-25).

It also leads to a faster depletion of Indias Foreign Exchange (FOREX) Reserves.

Widening of Trade Deficit: There is a sharp increase in India s trade deficit. The
steep increase in imports due to high oil prices leads to a further widening of the

trade deficit.
Increase in Oil Under Recoveries: As the pricing of Diesel, LPG & Kerosene is
still under government control; any rise in international oil prices is not reflected
in the domestic market. The inability of OMCs to sell fuel at the market defined
rate results in higher under recoveries. OMC have reported under recoveries
totaling Rs. 1,385,410.00 million for the Financial Year 2012. ( ONGC, Annual

Report 2011-12, P-96).

Mounting Fuel Subsidy Burden: Any hike in price of imported crude oil is
absorbed by the OMCs along with the Upstream Oil Companies & the federal
government. The fuel subsidy bill has witnessed a continuous rise for the past few
years. Governments fuel subsidy bill amounts to US $ 9 billion during 2010- 11
(International Institute of Sustainable development, iisd, Fuel Subsidies in India,

14th Aug 2012).

Worsening Fiscal Deficit: Indias Fiscal Deficit for 2009-10 stood at 6.6 % of
Gross Domestic Product (GDP). Rise in crude oil prices worsens the situation as
Government has to shell out more money in the form of fuel subsidy to OMCs.
High subsidies are putting pressure on fiscal deficit which has touched 5.9 % of

GDP in 2011-12 and Govt. has targeted to bring it down to 5.1% in 2012-13.
Reduced Amount for Infrastructure Investment: India aims to invest $1 Trillion in
infrastructure development during the 12thFive Year Plan (2012-17). High prices
of crude oil (leading to higher fuel subsidy & increase in fiscal deficit) have the
potential to derail the governments plans as they eat into the amount of disbursal
28

available with the government for infrastructure &social development schemes. A

continuous rise in the subsidy bill & worsening fiscal deficit has forced the federal
government to deregulate the petrol prices in the domestic market while inprinciple approval has been given for deregulation of diesel prices. However, the
Government reserves the right to intervene whenever the situation demand.

29

CHAPTER 2
RESEARCH METHODOLOGY
What is Research?
Research comprises "creative work undertaken on a systematic basis in order to increase the
stock of knowledge, including knowledge of humans, culture and society, and the use of this
stock of knowledge to devise new applications."]It is used to establish or confirm facts,
reaffirm the results of previous work, solve new or existing problems, support theorems, or
develop new theories. A research project may also be an expansion on past work in the field.
To test the validity of instruments, procedures, or experiments, research may replicate
elements of prior projects, or the project as a whole. The primary purposes of basic
research (as opposed to applied research) are documentation, discovery, interpretation, or
the research and development (R&D) of methods and systems for the advancement of human
knowledge. Approaches to research depend on epistemologies, which vary considerably both
within

and

between

humanities

and

sciences.

There

are

several

forms

of

research: scientific, humanities, artistic, economic, social, business, marketing, practitioner

research, life, technological, etc.
Research Methodology
Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done scientifically. In it we study the
various steps that are generally adopted by a researcher in studying his research problem
along with the logic behind them. It is necessary for the researcher to know not only the
research methods/techniques but also the methodology. Researchers not only need to know
how to develop certain indices or tests, how to calculate the mean, the mode, the median or
the standard deviation or chi-square, how to apply particular research techniques, but they
also need to know which of these methods or techniques, are relevant and which are not, and
what would they mean and indicate and why. Researchers also need to understand the
assumptions underlying various techniques and they need to know the criteria by which they
can decide that certain techniques and procedures will be applicable to certain problems and
others will not. All this means that it is necessary for the researcher to design
his methodology for his problem as the same may differ from problem to problem. For
30

example, an architect, who designs a building, has to consciously evaluate the basis of his
decisions, i.e., he has to evaluate why and on what basis he selects particular size, number
and location of doors, windows and ventilators, uses particular materials and not others and
the like. Similarly, in research the scientist has to expose the research decisions to evaluation
before they are implemented. He has to specify very clearly and precisely what decisions he
selects and why he selects them so that they can be evaluated by others also. From what has
been stated above, we can say that research methodology has many dimensions and research
methods do constitute a part of the research methodology. The scope of research
methodology is wider than that of research methods. Thus, when we talk of research
methodology we not only talk of the research methods but also consider the logic behind the
methods we use in the context of our research study and explain why we are using a
particular method or technique and why we are not using others so that research results are
capable of being evaluated either by the researcher himself or by others. Why a research
study has been undertaken, how the research problem has been defined, in what way and why
the hypothesis has been formulated, what data have been collected and what particular
method has been adopted, why particular technique of analysing data has been used and a
host of similar other questions are usually answered when we talk of research methodology
concerning a research problem or study.
Methodology is the systematic, theoretical analysis of the methods applied to a field of study.
It comprises the theoretical analysis of the body of methods and principles associated with a
branch of knowledge. Typically, it encompasses concepts such as philosophical or theoretical
frameworks, theoretical model, phases and quantitative or qualitative techniques.
A methodology does not set out to provide solutions - it is, therefore, not the same as a
method. Instead, a methodology offers the theoretical underpinning for understanding which
method, set of methods, or best practices can be applied to specific case, for example, to
calculate a specific result.
It has been defined also as follows:
1. "the analysis of the principles of methods, rules, and postulates employed by a
discipline"
2. "the systematic study of methods that are, can be, or have been applied within a
discipline"
31

3. "the study or description of methods"

TYPES OF RESEARCH
The types of research used in this case study are as follows:Applied Research
Qualitative Research
Conclusion-oriented Research

APPLIED RESEARCH
It is a scientific research that is used to solve practical problems rather than just acquiring
knowledge. It is used to find solutions to everyday problems.
QUALITATIVE RESEARCH
It is important in the behavioural sciences where the main aim is to find out the underlying
motives of human behaviour.
CONCLUSION ORIENTED RESEARCH
A researcher is free to pick up a problem, redesign the enquiry as he proceeds and is prepared
to conceptualize as he wishes.

OBJECTIVES OF RESEARCH :
To study and formulate the impact of crude oil prices on the whole sale price index of
Indian economy.
To study the waves of inflation rate (consumer price index) due to change in crude oil prices
on the GDP growth of Indian economy.
To examine and understand the direction of causality and to ascertain the causal relation and
linkage between differential change rate of crude oil prices and Inflation , also between
inflation vis--vis GDP growth of Indian economy.
32

 To study the impact of energy price relative to the productivity of capital and labor of Indian
industries based on the past data.

HYPOTHESIS
Hypothesis is a supposition or proposed explanation made on the basis of limited evidence as
a starting point for further investigation.
Hypothesis
1. Crude oil price plays an insignificant role in rising WPI of Indian economy.
Crude oil price plays a significant role in rising WPI of Indian economy.
2. The role of Inflation is insignificant for declining GDP growth of Indian economy.
The role of Inflation is significant for declining GDP growth of Indian economy.
3.

Crude oil price rate change does not Granger cause inflation.
Crude oil price rate change Granger causes inflation.

4.

Inflation does not Granger cause GDP growth.

Inflation Granger causes GDP Growth.

5. A rise in the price of energy relative to output does not lead to decline in productivity
of existing capital and labor.
A rise in the price of energy relative to output leads to decline in productivity of
existing capital and labor.

DATA SOURCE
PRIMARY DATA

33

It refers to first hand information which is collected to solve a specific problem. Primary data
is collected by interviewing respondents by building a questionnaire and getting required
response.
SECONDARY DATA
It refers to readily information available data from published or printed sources. It is normally
used in the case of academic research and to a certain extent in case of social research.
SAMPLE SIZE
Sample size determination is the act of choosing the number of observations or replicates to
include in a statistical sample. The sample size is an important feature of any empirical study
in which the goal is to make inferences about a population from a sample. The sample size of
my research is 50.
LIMITATIONS OF THE STUDY
The limitations of the study are those characteristics of design or methodology that impacted
or influenced the interpretation of the findings from your research. They are the constraints
on generalizability, applications to practice, and/or utility of findings that are the result of the
ways in which you initially chose to design the study and/or the method used to establish
internal and external validity.
1. Research conducted may not be considered as comprehensive as only limited
respondents could be contacted due to time constraints.
2. Some respondents are reluctant to respond to questions.
3. Sample size is very limited because of which conclusions drawn are not accurate and
does not cover the full population.
4. Purpose of the study had to be explained to the respondents because of which
responses may be biased.

34

REVIEW OF LITERATURE:
Oil prices matter to the health of an economy, despite a consistent fall in global oil intensity;
crude oil remains an important commodity and events in the oil market and continues to play
a significant role in shaping global economic and political development. Crude oil is the
world economys most important source of energy and is therefore, critical to economic
growth. The price of crude in global market is essentially driven by supply and demand. The
performance of world economy in general and the worlds largest economies such as US,
Japan and recently China have a significant impact on the demand for crude oil and vice
versa. The various method developed by IMF, World Bank(WB) and OECD have estimated
that 10 dollar increase in crude oil prices would lead to a decline of world production of
goods and services by 0.5%. The world economic growth and world oil demand are moving
in tandem and there is high correlation between world economic growth and demand for oil.
It is essentially the supply that drives the prices of crude oil. Many researchers agree in
opinion that no other economic event in post-World War II era generated as much attention as
the series of oil price shocks, mainly produced by OPEC countries. No studies were
necessary to see the clear relationship between oil prices and main economic indicators.
Nevertheless, this issue was new and researchers posed such a question as the numerical
impact of oil shocks and their correlation with the policy conducted by government in order
to predict the best instrument to cope with the negative impacts caused by oil price increases.
Since then a large number of studies have reported a correlation between increases in oil
prices followed by economic downturns. 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, while the research of 11
Berndt and Wood (1975,1979) as well as Wilcoxs (1983) indicates the complementarily
between energy prices and capital in the US economy is rather strong, both before and after
1973. Hence, oil price rise lead to shocks may have a stronger effect than generally believed.
These results were later extended by Mork (1989) and Hooker (1999) who argued that
asymmetric and nonlinear transformations of oil prices restore that relationship, and thus the
economy responds asymmetrically and nonlinearly to oil price shocks. 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
35

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. Others, including Barsky
and Kilian (2004), argue that the effect is small and that oil shocks alone cannot explain the
U.S. stagflation of the 1970s. Taking a more intermediate position, Bernanke et al. (1997)
argue that an important part of the effect of oil price shocks on the U.S. economy results not
from the change in oil prices per se, but from the resulting tightening of monetary policy. In
the same line of research, Blanchard and Gali (2007) present evidence showing that the
dynamic effect of oil shocks has decreased considerably over time, owing to a combination of
improvements in monetary policy, more flexible labor markets, and a smaller share of oil in
production. Their results indicate that a 10 percent increase in the price of oil would, prior to
1984, have reduced U.S. GDP by about 0.7 percent over a 23 year period, while after 1984
the loss would be only about 0.25 percent. In contrast to the extensive literature on the impact
of oil prices on the U.S. economy, there has Outside the U.S., studies of the relationship
between oil prices and the macro-economy have almost exclusively been confined to other 12
OECD members, with results suggesting that they tend to be affected in broadly the same
way as the U.S. but less strongly. Rasche and Tatom (1977 and 1981) explain that energy
price shocks alter the incentives for time to employ energy resources and alter their optimal
methods of production. Energy -using capital is rendered obsolete by any energy price
increase and the optimal usage of the existing stock is altered and production switches to less
energy- intensive technologies. The reduced capacity output of the economy is usually
referred to as decline in potential or natural output. The authors state that domestic aggregate
demand is affected due to a change in net imports of oil. The direction and extent of effects
depends on the countrys net oil export status. Net oil exporting countries experience an
increase (decrease) in aggregate demand when oil price rise (fall). The effect on net oil
importing countries is exactly opposite. Net oil exporting countries like Canada and the UK
receive a boost to aggregate demand and output/ employment from a spike in oil price. The
impacts on productivity tend to work in the same direction regardless of the oil trade status of
the country. An increase in oil prices has a negative impact on productivity. The theories
suggest that energy price shocks should affect the productivity of capital and labor resources.
Rati Ram and David Ramsey (1989) also took a production function approach (CobbDouglas specification) to estimating the elasticity. Their estimates for the United States are
somewhat unique in that they distinguish between privately owned and publicly owned
capital. A relative energy price variable is also incorporated and the estimation period is from
36

1948 to 1985. They obtained statistically significance energy price GNP elasticity estimates
that ranged between -0.074 and -0.069, depending on the disaggregation of public capital. 13
Micha Gisser and Thomas Goodwin (1986) estimated equations involving real GNP, general
price level, unemployment rate and real investment. They regressed each of those variables
independently on contemporaneous and four lags of M1money supply, the high employment
federal expenditure measure of fiscal policy and the nominal price of crude oil. 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 bbl on global
economy (IMF -2000). In the case of oil price increases, there will be a transfer of income
from oil consumers to oil producers. On an international level, the transfer is from oil
importing countries to oil exporters, and oil exporters tend to expand demand only gradually.
It will affect income redistribution of the global economy. Also, when oil prices increase and
energy input prices rise, there will be a rise in the production costs in the economy, depending
on degree of competition of the markets. As the oil intensity of production in developed
countries has fallen over the past three decades, the cost side impact of increases in oil prices
can be expected to be less than in past oil price increases. In developing countries, however,
where the oil intensity of production has declined less, the impact may be closer to that in the
earlier period. There will be a demand side impact of oil price increases. When oil prices rise,
consumers are likely to delay or postpone their purchasing durables such as automobiles. This
demand side impact leads to relative increase in inventories to sales and then decline
industrial production. 14 Finally, depending on expected duration of price increases, the
change in relative prices creates incentives for suppliers of energy to increase production and
investment, and for oil consumers to economize. The impact on developing countries seems
to be at least as large as for many of the industrial countries. Oil exporting countries suffered
seriously from the oil price decline in 1997-98 are expected to benefit substantially with
recent oil price increases. On the other hand, there is a negative impact on oil importing
countries, especially as dependency on oil has not fallen to the same extents as in industrial
countries. Oil price increases affect developing countries very differently. Oil exporting
countries such as UAE have a large current account surplus while many oil importing
countries are expected to be adversely affected. The oil price increase would add to its current
37

account deficit by 1.25 percent. A number of countries also face additional pressures from
weak non-oil commodity prices, and have limited access to capital markets, which will
further increase the adverse impact on domestic absorption. In major emerging market
economies, the results vary widely by region, depending on the relative size of oil importing
to exporting countries. Asia experiences the largest negative impact on growth. Latin
America, emerging Europe and Africa are less adversely affected by the oil shock. Among the
oil importing countries, the largest impact on GDP growth and the balance of payments is
expected to be in India, Korea, Pakistan, Philippines, Thailand, and Turkey. The oil price
increases will affect Chinas economic recovery, yet the direct impact of oil price hikes on
Chinas economy should be much less than that on most Asia-Pacific countries as the ratio of
net oil imports to domestic oil consumption is much lower than the Asian average. The ratio
for China is 22 percent, but 100.2 percent for Japan and 61.4 percent for the rest of Asia
Pacific. Also, oil occupies only 26.6 percent in Chinas primary energy consumption, much
lower than other Asian countries, which are heavily dependent on oil. Analysis of the impact
of high oil prices on the global economy by Economic Analysis Division, International
Energy Agency reports in Energy Prices and 15 Taxes, 2nd Quarter 2004, wherein it has
shown that the vulnerability of oil importing countries to higher oil prices varies markedly
depending on the degree to which they are net importers and oil intensity of their economies.
According to the results of a quantitative exercise carried out by the IEA in collaboration with
the OECD Economics Department and with the assistance of the International Monetary
Fund Research Department, a sustained for10 per barrel increase in oil price from $25 to $35
would result in the OECD as a whole losing 0.4% of GDP in the first and second years of
higher prices. Inflation would rise by half a percentage point and unemployment would also
increase. The OECD imported more than half its oil needs in 2003 a cost of over $260
billion-20% more than 2001. Euro-zone countries, which are highly dependent on oil imports,
would suffer most in short term, their GDP dropping by 0.5% and inflation rising by0.5% in
2004. The U.S would suffer the least, with GDP would fall 0.4%, with its relatively low oil
intensity compensating to some extent for its almost total dependence on imported oil. In all
OECD regions, these losses start to diminish in following three years as global trade in nonoil goods and services recovers. This analysis assumes constant exchange rates. The adverse
economic impact of higher oil prices on oil-importing developing countries is generally even
more severe than for OECD countries. This is because their economies are more dependent
on imported oil and more energyintensive, and because energy is used less efficiently. On
average, oil-importing developing countries use more than twice as much oil to produce a
38

unit of economic output as do OECD countries. Developing countries are also less able to
weather the financial turmoil wrought by higher oil import costs. India spent $15billion,
equivalent to 3% of its GDP, on oil import in 2003. This is 16% higher than its 2001 oil
import bill. It is estimated that the loss of GDP average 0.8% in Asia and 1.6% in very poor
highly indebted countries in the year following a $10 oil-price increase. The loss of GDP in
Sub-Saharan African countries would be more than 3%. 16 World GDP would be at least half
of one percent lower equivalent to $255 billion- in the year following a $10 oil price
increase. This is because the economic stimulus provided by higher oil export earnings in
OPEC and other exporting countries would be more than outweighed by depressive effect of
higher prices on economic activity in the importing countries. The transfer of income from oil
importer to oil exporter in the year following the price increase would alone amount to
roughly $150billion. A loss of business and consumer confidence, inappropriate policy
responses and higher gas prices would amplify this economic effect. For as long as oil prices
remain high and unstable, the economic prosperity of oil-importing countries-especially the
poorest developing countries-will remain at risk. World Economic Outlook April-2007
reports there is a global macroeconomic implications of a supply induced oil price hike and
persistent productivity shocks with low oil capacity. In fiscal 2010, the Indias import bill for
crude oil was $100.08billion, which of 7.12% higher in volume than fiscal 2009, crude oil
import bill increased to around $ 20.527billion. That means there was a jump of 25.8% in
crude oil import bill for fiscal 2010 from previous fiscal 2009 i.e. $79.553billion. 2.1. Gap
Analysis Crude oil prices played a critical role in substantially reducing economic growth in
any economy whether it is developed or developing economy. Worldwide demand for crude
oil arises from demand for the refined products that are made from crude; and changes in
crude oil prices are passed on to consumers in the prices of the final petroleum products.
When the prices of petroleum products increase, consumers use more of their income to pay
for oil-derived products, and their spending on other goods and services declines. The extra
amount spent on those products is basically go to foreign oil producers as India is net
importer of oil. 17 Oil is a vital input for the production of a wide range of goods and
services, because it is used for transportation in business of all types. Higher oil prices thus
increase the cost of inputs; and final product price increases cause inflation, if the cost
increases cannot be passed on to consumers, economic inputs such as labor and capital stock
may be reallocated. Higher oil prices can cause worker layoffs and the idling of plants,
reducing economic output in the short term. In a net importer of oil economy like India,
higher oil prices shrink foreign reserves of the economy, affect the purchasing power of the
39

economy in terms of International trade. The increased price of imported oil forces the
businesses to devote more of their production to exports, as opposed to satisfying domestic
demand for goods and services, therefore cause inflation, even if there is no change in the
quantity of foreign oil consumed. Higher oil prices cause, to varying degrees, increases in
other energy prices. Depending on the ability to substitute other energy sources for crude the
price increases can be large and can cause macroeconomic effects similar to the effects of oil
price increases. Thus, though energy is the prime mover in an economy, the demand and
supply gap of crude oil must be bridged through import to meet the countrys requirement,
hence, crude oil price is an important parameter in determining reserve position and trade
balance and finally balance of payment. Inflation is also an important area arising with the
increase of crude oil prices, with the increase of inflation, capacity to purchase is reduced and
expenditure increases, saving decreases, ultimately slows down the business and economic
activities thus slows down GDP growth.

BIBLOGRAPHY:
40

www.google.co.in
www.processworldwide.com
www.quroa.com
www.dypatil.edu
www.moneycontrol.com
www.basiceconomicreviewcom
www.timesofindia.com
www.economicstimes.com
www.oilandgasjournal.com

QUESTIONNAIRE:
41

Name :
Gender :
Male

Female

Q1. Which group you are in ?

Age between 15 25 years
Age between 25 45 years

Q2. Are you aware about oil price in India ?

Yes

No

Q3. Are interested in such type of topics?

Yes

No

Q4. Do you read newspaper?

Yes

No

Q5. What do you this about Indias import of crude oil from different countries?

Q6. Does Indian economy have any impact in increase or decrease in oil price?
Yes

No

42

Q7. If the above answer is yes than how?

Q8. Crude oil price changes growth of GDP?

Yes

No

Q9. You think India should take major steps to reduce their Imports from other countries?

Q10. Can rates of cude oil be stabilised in near future?

Yes

No

Q11. Crude oil price plays critical growth in reducing economic growth?
Yes

No

Q11. Does there is any impact in final product of consumption due to increase or decrease in
oil price
Yes

No

Q12. If the above answer is than how?

Q13. Increase in population and there usage of vehicle affects crude oil price?
43

Yes

No

Q14. You think due to over usage of crude oil Indias dependence on other countries will
increase?
Yes

No

Q15. Does change in political policy effects anyway in crude oil price?
Yes

No

44