"The Impact Of Oil Price Fluctuation On Balance Of Payments,Inflation And Growth In South Asia (2000-2010)"

South Asia is a continent size region that constitutes almost25percent of world population and where40percent of the inhabitants are living a life below poverty line. In proportion to the size land mass and population, the region has still a long way to achieve high standard of living, growth and socio-economic stability. Recently the region depict high growth rate and successfully integrated itself to the world economy. However, the uncertain supply and fluctuation in prices of major production input, that is oil, put some pressure on the growth rate and contributed to the deterioration of other macro-economic variables including inflation and balance of payments. This created a kind of productivity anxiety and deteriorated the level of social-economic indicators; however, no alternative to oil is in sight yet. In South Asia, Oil constitutes almost60percent of total energy consumption, where a big chunk, nearly70, percent is imported, while the rest is produced in the region varying from country to country. For example, India produces30percent of oil locally while domestic oil production in Sri Lanka and Nepal is almost negligible.Oil Price fluctuation is not a new phenomenon. The widespread literature available on the affect of oil price fluctuation (including the concept of asymmetry in the impact of oil prices on output) evolved over the period of time. Since1990, it is widely accepted that the impact of oil price change in case of increase and decrease is not linear and the adverse impact of rise in oil price is more than the beneficial impact of oil price decline. Similarly, the oil price rise not only has adverse direct impact on the cost of production, productivity and growth but also has negative impact on inflation and trade balances. Therefore, in this study we tried to understand the impact of oil price fluctuation on balance of payments, inflation and growth on the selected South Asian countries in the first decade of21st century. For this we employ a number of regression and statistical techniques and on the basis of it we compared the overall impact of oil price fluctuation in the region.World economy in many ways i.e. reduction in poverty, increase in production, consumption and contribution to global output depends on the emergence of South Asia. Despite2002’dotcom bubble’ and2008financial crisis, the region is doing well and the countries in the region have depicted almost5percent growth rate in the last decade. But economic activities in South Asia, like rest of the world, is vulnerable to oil price fluctuations that seriously influenced the macroeconomic performances of this area and a number of researchers have tried to capture the impact of high oil prices on some parts of the macro-economy, but there is hardly any study that have collectively observed the impact of oil prices change across the region.What the study observed through Granger and Multivariate Granger Causality is this that selected countries in the region get affected by high oil prices. These countries, where domestic oil production is meager, individually as well as collectively lack the ability to influence international oil prices. For example, India is growing rapidly and the share of Indian oil consumption in the world is on the rise. However, the total output of India is less than1percent of total global output and therefore, India lack the muscle to influence world oil prices through increase or decrease in the demand of oil. The story of other countries in the region is not different. In other words the fluctuation in international oil price, particularly the rise in prices level, affects the domestic production of goods and services in South Asia, while the decrease in oil prices does not bring any significant positive changes in economic growth.This study also shows that the oil price-GDP relationship appears to be distinct among countries by their economic characteristics. In South Asia oil price impact last from4to8quarters depending on the size and structure of an economy. It shows that a short-run negative impact of an oil price shock to the GDP of India is detected, while for the rest of the region the impact lost for longer time. This study also shows that in south Asia the causality is still one way, running from the oil price fluctuation (particularly the rise in oil prices) to other macro economic variables. This strengthens the perspective of the existing studies that consistent oil prices are the key to robust macroeconomic performances in most economies.Interestingly, all the economies under observation exhibited that economic activity affected by oil price fluctuation recovers in the long-run after a short-run adverse impact of the initial slump in GDP due to an oil price rise. We discovered that changes in the growth rate due to oil prices fluctuation lasted for more than two to four years and have a statistically significant impact on future output growth, whereas less persistent changes (that is lasting more than a year, however, less than2years) have no specific impact on output growth in the region. In contrast,’temporary’ fluctuations in the oil price persisting for only a year or less does not affect the growth of the South Asian countries. All these observations are carried out on the basis of a number of techniques from ARDL to Response Functions and from Solow augmented models to simple OLS techniques. The study analyzed that the rise in oil price increase the production cost and decrease total exports from the region on one hand, while on the other increase the import bill across the board that put huge pressure on the external balances of the selected countries. Oil is one of the major sources of persistent trade deficit in the region that consume huge foreign exchange reserves. Thus oil price rise has dual affect on Trade deficit; on one hand it reduces competitiveness by increasing the cost of exports while on the other increase the import bill.Similarly, oil is the basic input in industrial production and is widely used for transportation of goods. A rise in the oil price increases the cost of input that push wages up. Therefore, oil price rise contributes to the general rise in prices, while decline in oil price (keeping in view the downward price rigidities) is not going to depress the general price level. In this backdrop, increase in oil prices permanently contributes to the consumer and producer price indices.Therefore, waves in global oil price variation and usual trade imbalance attached with oil price have raised serious alarms among the policy makers around the world, because of its aggressive impacts for the net oil-importing economies. It also suggests that better management, bargaining or less reliance on oil as a source of energy for large and growing economies made these economies relatively immune to oil price fluctuations, while the small economies with a huge reliance on oil based industrial production and exportation are very vulnerable to oil price shocks and fluctuation. In the first case India while in the second Pakistan is the best example.