Energy Import Dependence, Global Oil Price Shocks and Economic Growth in India: An ARDL Approach with Structural Breaks

Abstract

This study investigated the connection between oil price shocks worldwide, reliance on energy imports, and the development of the Indian economy in the years 1991-2024. Since India is one of the biggest importers of crude oil, international energy prices are likely to be very harmful to the macroeconomic stability and growth performance. The analysis uses Autoregressive Distributed Lag (ARDL) bounds testing model to examine the long term equilibrium relationships as well as short term adjustment mechanisms, including inflation, and current account balance and structural break in the year 2008 as a result of the global financial crisis. The findings verify the presence of a cointegrating relationship between the variables in the long-run. Nonetheless, the individual long-run coefficients are not statistically significant indicating that the oil prices levels do not have a permanent structural effect on the growth. Contrary, short-run analysis indicates that changes in lagged oil prices and external sector imbalances have a substantial impact on growth. The error correcting term shows that the system quickly corrects to the equilibrium in the aftermath of the short term shocks. The implication of these results is that the oil price vulnerability to growth of India works through short-run (macroeconomic) transmission mechanisms and not structural impairment. Enhancing the resilience of the external sector and speeding up the diversification of energy sources are also important policy priorities.