Wellbeing: An Occam’s Razor Example of Case Studies

 Introduction

Over the course of human history, we have realized that for the growth of a society and economy, civilization and culture requires a constant set of economic activities. These economic activities driven by human labour are required no matter how much technological progress we make. Further, these economic activities are propelled by the need for a labor force.  A labor workforce is a collective of human beings who comes from different socioeconomic and cultural constructs. They drive the economic activities.

Happiness of a labor workforce is crucial for an economy or a larger society to stay happy. However, it is also important to understand how and which factors are impacting the labor workforce and in what way they are impacting. While their impact is being considered, one also needs to understand the degree of impact on various happiness indicators. This degree of impact can only be understood by trying to understand the hidden, latent factors which finally impacts the happiness and wellbeing of the individuals of a labor workforce. This is because, if a labour workforce in an employing economic sector is happy, the economy and the larger society are expected to attain a state of wellbeing. Well being is often defined by the mental health and state of happiness of people which is in reality a subjective context.

Source: www.google.com

Well-being is a generic term and used frequently in a loose, rhetorical way in our day to day lives. In an Aristotelian definition, well-being is often seen from relational, material, and aspirational way. It also imbibes the concept of equity and fairness. Even a beggar who scores poorly in terms of material well being can exist at a higher level of happiness and well being in terms of relational wellbeing. The beggar can be contained with his or her state of mind, situation and be happy and more self contained and at peace than an individual staying in a sky scraper. Hence, wellbeing is a relative, debatable term. Development discourse and economics often defines wellbeing as a capacity to fulfill one’s need and sustain the basic needs of human life defined by access to clean food, water, house, clothes,education, health and sanitation and various other indicators defined by the Sustainable Developmental Goals of UN.

In this regard, Amartya Sen has defined well-being through three distinct categories which are materialistic, social and relative. Furthermore, according to Sen’s definition, the three well being categories are stated as –

1. Materialistic wellbeing of a person is defined as a state in which a person holds or earns a certain amount of regular income through which the person can get access to food, cloth, education and shelter for the individual and the larger family of the individual. 
2. Social wellbeing refers to the attitude and behavior of a person and deals with the level of satisfaction or happiness of a person?
3. Relative wellbeing refers to the comparative nature of human beings and it innately includes the desire to want more because other people have more of what they want.

It is assumed that with a growth in employment, income of individuals will go up and it will therefore enhance the material and psychological well being of individuals by providing them more liquidity and access to material aspects of life. However, this is in a large way a materialistic definition of wellbeing.

Literature provides an ample evidence of the relation between employment and psychological wellbeing. For instance, Cropanzano and Wright (2000) studied the happy worker hypothesis in which they conducted two field studies studying the relation between psychological wellbeing of individuals and job performance of employees and later compared between these two studies. 

The comparison of the studies showed that there was a positive relation between a happy worker with better psychological wellbeing and higher performance. The comparison showed that a “happy” worker with a relative higher psychological wellbeing often have higher performance than the worker with lower psychological wellbeing.

In a study conducted by Cooper et.al (2005)2, the predictors of labour productivity (i.e., in terms of work performance) were investigated with “A Shortened Stress Evaluation Tool”. Around 16001 employees were studied with 26 various occupations.  In the study, 3 variable parameters were studied and they were psychological wellbeing, physical well being and job satisfaction. The study found that people with more stressful occupations tend to have a lower psychological wellbeing and had the least job satisfaction in comparison to other people who had higher psychological well being and greater job satisfaction. Darko et.al (2021)found out that not all employed people are always happy.

Therefore, there is a need to understand the relation between wellbeing and work efficiency of the people from different sections of the society working in different sectors of the economy. This is because socio-cultural constructs and background do impact the wellbeing of people and hence on their efficiency in the workplace. After understanding the differential nature of impact of the socio-cultural constructs on worker efficiency, it is important to assess why the same or different factors impact workers in different working contexts in a varied form. Therefore, some of the questions that we need to ponder are –

1. Is there any relationship between efficiency and the psychological wellbeing of an employee?
2. Does higher income indicate better psychological wellbeing?
3. Which sectoral employees have the highest job satisfaction?

In order to explore these questions, a survey based method was used focusing on age groups of 18 -30 and 30-40. The survey was conducted for employees from the private, government sector. Questions regarding their well being were asked and further insightful interview methods were applied to understand why they were in a certain state of well being.

Moreover, it was also found whether their status of wellbeing had any relation between their psychological wellbeing and efficiency in their respective workplaces. Indicators of wellbeing were marked on a scale of 1 to 5.  The well being indicators followed Cropanzano and Wright’s (2000)1 self-marked indicators. People were asked how often they get the following feeling (as stated in Table 1) in a week on a scale ranging from 1 to 5,with 1 being not at all and 5 being all the time. The factors related to the feeling were demarcated as Lonely, Depressed, Bored, Restless, Uneasy, Excited, Pleased, Top of The World. Within each category of the factors further sub-categorisation was created as – Very lonely or remote from other people (within lonely), Depressed or very unhappy (within Depressed), Feeling nothing interesting or nothing to do (within Bored), Restless and not able to sit in chair (within Restless), Uneasy (Uncomfortable in different situations), Excited (feeling enthusiastic), Pleased (feeling satisfied), On top of the World (Extremely Happy).

Various indicators were considered linking the wellbeing and efficiency of the workers. Cooper et.al (2005)2 discusses different factors affecting psychological wellbeing of an employee in the work place. The following factors were analyzed in the survey based study where each factor was being explained by a certain, specific descriptive questions like – a) How much do other people affect each other in a work place? Is it a healthy atmosphere? (Within Work Relationships), b) How the work place balances its extra work? And how is the nature of the job itself? (Within Overload), c) How much control does the employee has on its time? Is the job very binding in nature? (Within Control), d) What is the level of job security being given to the employee? (Within Job Security), e) Are the resources, tool or materials being given to the employee? (Within Resource and Communication), f) How much time does the job take of the employee on a daily and weekly basis? (Within Work Life Balance), g) What are the extra pays and benefits being given to the employee and how often are they given? (Within Pays and Benefits), h) To what level is the organization committed to their employee (Within Commitment of the organization to employee), i) To what level is the employee committed to their organization (Within Commitment of the employee to organization)

Psychological well being of child and teen aged labor are explained by various latent factors as explained by Darko et. al (2021). Some of these other latent factors which have been considered in the survey deals with the following questions – a) What is the condition of their household emotionally? What is the bond they share with their family? How supportive and listening their family members are? (Household Factor), b) What is the financial condition of their family? Do they inherit a good financial status or is it made up by them? How much financial support do their families give? (Wealth Factor), c) Have they faced any biases at work, home or any place due to their gender? How does their gender affect them? What are the extra responsibilities they have to take care of due to their gender? (Gender Factor),  d) How their childhood has been in terms of financial and emotional? What are the memories they remember the most? What do they crave the most from their childhood? (Childhood Health Factor),  e) Have they experienced any shock and how has it affected them? (Experience of Shocks Factor).

Findings:

The survey findings using the above questionnaire framework clearly highlight that well being is not a homogenous concept at all within the employees of an organization. Different people with same set of inducing wellbeing factors behave differently in varied contexts. Even the same person can behave differently in terms of his or her well being under the same set of well being inducing factors. Hence, one set of policy is not enough to address the issues and challenges of wellbeing of human labour in workplaces. One individual can go through a range of well being emotions within the same organization under different working, cultural and larger societal, individual contexts. This can happen even with the presence of same set of well being incentives given by the organization. The insights emerging from the study and related to well being are therefore like an Occam’s razor where even one particular case study finding can be a distinct truth and no generalization can be done. A particular case study finding can act like an absolute truth for policy making. Keeping this in mind, 15 distinct people from different income, social and cultural backgrounds were interviewed for the research. An ethnographic analysis was conducted based on a questionnaire based method. Out of the total interviewed population, 33% was female and the rest being the male. In the survey most young employees were employed in private sector.

The findings from the study indicated that the human labour in the workplaces of the different economic sectors were enthusiastic, passionate and excited about their work. However, at the same time, more than 50% of them were also lonely. This indicated a situation, that while people who are joining the private sector to work are excited about to work with a dream about their future aspiration, they at the same time are lonely, depressed, bored and restless. Many of these employees are new employees who have a dream for their future and hence when they are joining the job market, they feel excited or at the top of the world. However, slowly that top of the world feeling has been fading away and is also complemented by emotions of loneliness, boredom.

The cause of concern is that there is a tendency of boredom which is setting in these workers making them lonely in future. Thus, the policy to address the well being of these labour work-force cannot be uni-dimensional or cannot be too rigid or restrictive. The policy has to give space to the multiple layers of conflict and feelings of the labour workforce which is ranging from depression, boredom, loneliness to extreme happiness and being at the top of the world. This indicates well being of the future society will be more complex to address as it is going to be marked by large range of conflicting individuals within the same person. Hence, a more, dynamic, innovative, malleable policy framework for addressing well being of labour work force will be required in future. Such a framework will also have to reinvent or re-innovate itself regularly to address the emerging, dialectical, conflictual challenges of wellbeing which a hyper consumerist, materialistic society is facing everyday in India.

References

1. Cropanzano, R., & Wright, T.A. (2000). Psychological Well-Being and Job Satisfaction as Predictors of Job Performance. Education publishing foundation. https://www.researchgate.net/publication/12655756_Psychological_well-being_and_job_satisfaction_as_predictors_of_job_performance
2. Cooper, C., & Johnson, S., & Cartwright, S., & Millet, C., & Donald, I., & Taylor, P. (2005). The experience of work-related stress across occupations. Emerald Group Publishing Limited. https://www.researchgate.net/publication/232516798_Work_Environments_Stress_and_Productivity_an_Examination_Using_ASSET
3. Rajeswari, M., & Magesh, R. (2017). A Study on Psychological Well-Being among Employees of I.T Companies. Canadian Center of Science and Education. https://www.researchgate.net/publication/318676104_A_Study_on_Psychological_Well-Being_among_Employees_of_IT_Companies
4. Darko, C.K., & Carmichael, F., & Vasilakos, N. (2021) Well-being and employment of young people in Ethiopia, India, Peru and Vietnam: Is work enough?. Development Policy Review. https://onlinelibrary.wiley.com/doi/full/10.1111/dpr.12565
5. Mokona, H., & Yohannese, K., & Ayano, Getinet. (2020) Youth unemployment and mental health: prevalence and associated factors of depression among unemployed young adults in Gedeo zone, Southern Ethiopia. International Journal of mental health system. https://ijmhs.biomedcentral.com/articles/10.1186/s13033-020-00395-2
6. Fisher, C.D. (2010). Happiness at work. International Journal of Management Reviews. https://www.researchgate.net/publication/227533694_Happiness_at_Work
7. Gil-Monte, P.R., & Salas-Vallina, A., & Pozo-Hidalgo, M. (2020) Are Happy Workers More Productive? The Mediating Role of Service-Skill Use. https://www.frontiersin.org/articles/10.3389/fpsyg.2020.00456/full
8. Guerrero, R.F., & Salas-Vallina,A., & Alegre, J. (2018).  Happiness at work in knowledge-intensive contexts: Opening the research agenda. European Research on Management and Business Economics. https://www.sciencedirect.com/science/article/pii/S2444883418300883
9. Tordera, N., & Peiró, J.M., & Kozusznik, M.W., & Molina, I.R. (2019). The Happy-Productive Worker Model and Beyond: Patterns of Wellbeing and Performance at Work. Int J Environ Res Public Health. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6388150/#__ffn_sectitle

Excerpted from Sayyed S; Goswami A, "Wellbeing: An Occam’s Razor Example of Case Studies", The Dispatch. Original article accessible here.

Professor Anandajit Goswami is Professor and Head of the Department of Social and Political Studies and Director of the School of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. anandajit.fbss@mriu.edu.in

Saba Sayyed is an undergraduate final year student of Economics Honours in the Department of Economics, School of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies.

The G20 can bridge India’s digital financial service gap

Financial inclusion — which aims to provide access to financial services for all individuals and businesses regardless of their social and economic status — has gained significant attention globally. The COVID-19 crisis increased the need for contactless financial products and services, accelerating financial inclusion and the evolution of digital finance.

Source: https://www.eastasiaforum.org/2023/05/18/the-g20-can-bridge-indias-digital-financial-service-gap/

Globally, there has been a great increase in formal bank account ownership from 51 per cent in 2011 to 76 per cent in 2021, with a steep average increase in developing countries from 42 per cent to 71 per cent. During the same period, bank account ownership more than doubled from 35 per cent to 78 per cent in India. But challenges to free access remain, such as the digital divide, lack of financial literacy, cybersecurity and data privacy.

The G20 has recognized financial inclusion as a fundamental driver of economic growth, which reduces economic vulnerability and poverty and enhances people’s quality of life. In 2010, it implemented the first G20 Financial Inclusion Action Plan (FIAP) as part of the Global Partnership for Financial Inclusion (GPFI) — a global platform for promoting financial inclusion.

In 2017, G20 FIAP was aligned with the UN Development Programme 2030 Agenda for sustainable development. Further in 2020, G20 FIAP recognised the role of financial inclusion in mitigating COVID-19’s negative effects through government intervention and technology adoption.

India has been actively involved in the G20 GPFI and participated in various GPFI working groups and task forces. The country contributes to the development of international standards, best practices and policy recommendations for financial inclusion.

One of the key pillars of India’s financial inclusion policy is Pradhan Mantri Jan-Dhan Yojana (Prime Minister’s People’s Wealth Scheme, PMJDY) — a flagship program launched in 2014 that aims to provide financial services to unbanked and underbanked populations. This program has been providing millions of previously unbanked individuals with basic savings accounts, insurance and pension services.

India has also implemented various other policy measures to promote financial inclusion, such as Pradhan Mantri Mudra Yojana (Prime Minister’s Micro Units Development and Refinance Agency Scheme, PMMY), which provides credit facilities to small- and medium-sized enterprises, as well as Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana (Prime Minister’s Life Insurance Scheme), which provide affordable life and accident insurance coverage to economically vulnerable segments of society.

Since its inception in 2015, the PMMY scheme has granted Rs 23.2 trillion (US$283.8 billion) worth of loans to over 408 million beneficiaries. These loans help facilitate collateral-free micro-credit and generate employment opportunities.

The PMMY scheme has also benefited women entrepreneurs as 68 per cent of accounts are reserved for women under this scheme. But the government still needs to address regional and gender disparities, social and regional inequalities, financial illiteracy, information asymmetry, vulnerability to financial fraud and the digital financial divide to achieve inclusive economic growth.

Recent research based on the 77th round of All India Debt and Investment Survey using 2019–20 survey data finds that government financial inclusion programs like the PMJDY have a noticeable impact on households. This research suggests that despite being illiterate, 57 per cent of household heads have access to at least one financial instrument, such as deposits in saving bank accounts, fixed deposits and post office accounts.

Moreover, 50 per cent of the household heads with higher education have access to two or more instruments. Around 6 per cent of illiterate household heads use at least three financial instruments. This indicates that the financial literacy of family members, higher economic activities in the region and better information pass through increase the awareness of financial products and services.

Financial literacy can potentially reduce the marginal impact of illiteracy, allowing more people in rural households to benefit from financial inclusion. But women and other socially excluded entrepreneurs have lower utilisation rates of financial instruments. This is due to the high collateral requirement, preference-based supply-side discrimination and high-interest rates while accessing formal financing. These barriers arise because of the small size of loans and the perceived riskiness of women entrepreneurs.

Despite numerous government programs — including the PMMY Scheme, the Udyogini Scheme, the Dena Shakti Scheme and the Annapurna (Goddess of Food) Scheme — there is still scope to improve the business environment for entrepreneurs in rural areas through financial outreach programs. Appointing more women business correspondents, increasing digital literacy and implementing more women-centric policies would facilitate access to formal finance.

Digital financial services can also fill the gap in improving access to financial services through the G20 High-Level Principles for Digital Financial Inclusion. Doing so would help achieve the gender equality goal of sustainable development. Continued efforts towards advancing financial inclusion policies are crucial to promote empowerment and inclusive growth.

Excerpted from Kumarasamy, D; Singh P and Kaur, S, "The G20 can bridge India’s digital financial service gap", East Asia Forum. Original article accessible here.

Durairaj Kumarasamy is Associate Professor and Head of the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. durairaj.fbss@mriu.edu.in

Prakash Singh is Assistant Professor at the Goa Institute of Management.

Sukhvinder Kaur is Research Scholar in the Department of Economics at Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies.

Cross-border trade is the missing piece for India’s growth

The potential for cross-border trade between India and its neighbouring countries — Bangladesh, Bhutan, Nepal, Myanmar, Pakistan, Afghanistan and China — has not been fully realised. India’s formal cross-border trade with these countries was about US$2.48 billion in 2021 despite the US$115 billion trade potential. Only nine of India’s seventeen border states are actively engaged in cross-border trade. 

Source: East Asia Forum

This is due to political and security reasons, difficult geographical terrain for connectivity and growing informal trade which has stemmed from open borders in most of the northeastern region. 

Borders with neighbouring countries are often not properly fenced and guarded, resulting in insurgency and illegal movement of goods and people. Most of the northeastern region, as well as Jammu and Kashmir, face insurgency issues. Insurgents take advantage of porous borders to escape from the army as they are internationally well-connected and have hideouts in neighbouring countries. 

Another persistent issue is the undocumented cross-border migration from Bangladesh to India’s border regions, which results in human trafficking and other crimes. This has catalysed bilateral tensions between the two countries. The realities of the northeastern region pose a challenge to India’s open economic policy as conceptualised by the ‘Act East’ policy, which is currently oscillating between the need for basic economic development in the region and security constraints. 

Despite these challenges, northeastern states possess the potential to leverage their strong ethnic and cultural ties with neighbouring countries to facilitate the trade of locally produced goods via border haats (local markets along borders) and other channels. These channels can create numerous employment opportunities for young people. 

The proposed increase in border haats with Bangladesh, construction of new airports and the new PM-DevINE scheme (a regional development initiative) allow northeastern states to break the cycle of dependence on the central government. 

Both the central and state governments have introduced many developmental and infrastructural initiatives, such as Bharatmala — an intra-national transport network to strengthen land route connections with neighbouring countries. 

But despite these initiatives, northeastern states still face an infrastructural deficit. Poor road connectivity and a lack of bridges remain the biggest infrastructural challenge in the border districts of the state. Most villages do not even have access to tap water and electricity, and the Border Area Development Program does not have sufficient funds to fulfil the needs of border districts. Most borderlands lack basic amenities and employment opportunities, causing people to leave. 

The central government’s flagship initiatives, Make in India and the Self Reliant India Campaign, are efforts to make India a manufacturing hub. Given that vision, regional integration should be at the top of India’s foreign policy agenda, because it would help overcome constraints to the flow of goods, services, capital, people and ideas — all of which are critical to delivering high economic growth.

The central government needs to increase budget allocations for infrastructure and development initiatives in the border areas to provide necessary facilities for local populations. State governments could establish Export Promotion Zones for border trade through Integrated Check Posts by providing institutional and financial support to local entrepreneurs. They could also initiate an institutional framework at the state level to boost local trade, with designated ministries identifying local challenges and strengths.

The role of sub-regional groupings such as the Bay of Bengal Initiative for Multi-Sectoral Technical Economic Cooperation (BIMSTEC) and the Bangladesh, Bhutan, India, Nepal Initiative in facilitating border trade in India cannot be ignored. These groupings help reduce trade barriers, harmonise trade policies, develop infrastructure, enhance cooperation and promote regional integration which are essential for facilitating cross-border trade. 

BIMSTEC is in line with India’s ‘Act East’ policy, which seeks to foster greater regional cooperation in Southeast Asia. During the 2022 summit, Indian Prime Minister Narendra Modi urged BIMSTEC leaders to transform the group into a means of connectivity, prosperity and security — the three drivers of India’s regional diplomacy. 

India considers soft and hard infrastructure connectivity a key priority of its regional foreign policy. New Delhi’s recent initiatives such as the Bangladesh, Bhutan, India, Nepal Initiative Motor Vehicles Agreement, the expansion of cross-border railway linkages with Nepal and Bangladesh, the India–Myanmar–Thailand trilateral highway, efforts to start direct flights between Indian cities and Southeast Asian tourist destinations and the Security and Growth for All in the Region initiatives are all evidence of India’s commitment to this goal.

It is difficult to deliver high GDP growth without simultaneous growth in trade, particularly where manufacturing relies on integrated cross-border value chains. 75 years after independence, India — with its experience in soft power diplomacy to manage international relations — can lead the cross-border territorial integration with neighbouring countries to promote peace and prosperity across the border states. 

Excerpted from Kumarasamy, D and Nayyar, M (2023), "Cross-border trade is the missing piece for India's growth", East Asia Forum, Crowford School of Public Policy, Australian National University. Original article accessible here.

Durairaj Kumarasamy is Associate Professor and Head of the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. durairaj.fbss@mriu.edu.in

Manisha Nayyar is Assistant Professor in the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. manisha.fbss@mriu.edu.in

The Dominance of Oil Price Fluctuations on India’s Exchange Rate and Foreign Reserves

 

ABSTRACT

Crude oil prices are a major factor in every nation's economic development. More than 70% of India's crude oil needs are met by imports. This article's objective is to analyze how changes in the price of oil affect the expansion of the Indian economy, in particular the exchange rate and foreign reserves.

 

KEYWORDS

Crude Oil price, Growth of Indian economy, Inflation, Imports of crude oil, balance of trade deficit, Exchange Rates, Foreign Reserves

INTRODUCTION

Economic growth cannot be separated from the role that energy plays. Oil continues to be one of the most important energy sources, along with coal, natural gas, electricity, solar, wind, and nuclear energy, in a nation's economy, supporting things like transportation, businesses, and households. India is similar to other countries in this sense, however oil is the major energy source there, making up 31% of primary energy consumption. India is the seventh-largest nation in the world, with a population of more than 1.2 billion. It contributes 17.2% of the global population and has the second-largest population.

As per the Monthly Ready Reckoner January, 2023 (Ministry of Petroleum & Natural Gas), India produces 29.7 MMT( million metric tons) in 2022 and consumed 204.7 MMT of petroleum products as compared to 194.3 MMT in the year 2021.India imports 80% of its crude oil, whereas just 20% is produced domestically by PSUs like ONGC, OIL, and other private entities. Several PSU businesses including IOCL, BPCL, and HPCL as well as private entities like Reliance and Essar refine and process crude oil in India. India is one of the world's top importers of crude oil. India mostly imports crude oil from the Middle East.

Source: www.google.com

A group of 13 significant oil-producing nations known as OPEC generates nearly 40% of the world's crude oil collectively. Around 60% of the petroleum traded internationally is exported by the OPEC. India is the third-largest crude oil importer in the world, after China and the United States. 85 percent of our total imports of petroleum and 94 percent of our purchases of gas come from OPEC nations. Moreover, India is currently importing crude oil from Asia Pacific, Africa, and South America. India imported 120 billion dollars' worth of crude oil in 2022, roughly twice as much as it imported the year before.

Due to India's substantial reliance on oil imports, which is demonstrated in Figure 1, multiple oil price shocks that have an impact on both the domestic economy, directly and indirectly, are most likely to occur.

Figure 1: Share of India's Oil Import

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India

Note: Share of Oil Imports= Total Oil Imports (in dollars)/ Total Oil+Non-Oil Imports(in dollars)

WHY DO OIL PRICES FLUCTUATE?

 

1. The Organization of Petroleum Exporting Countries, or OPEC, is the primary factor affecting changes in oil prices. Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela make up the group known as OPEC, which will consist of 13 nations as of 2021. The consortium decides on production levels to satisfy global demand and has the power to change oil and gas prices by raising or lowering output. Prior to 2014, OPEC promised to maintain oil prices above $100 per barrel for the foreseeable future, but in the middle of the year, the price of oil started to decline. It dropped from a peak of more than $100 a barrel to less than $50 per barrel. In that case, OPEC was largely to blame for the low price of oil since it refused to reduce oil output, which caused prices to fall.
2. Supply and Demand: Oil prices fluctuate according to the principles of supply and demand, just like they do with any other good, stock, or bond. Prices decrease when supply outpaces demand; the opposite is also true when demand outstrips supply. Reduced oil demand in Europe and China, along with a consistent supply of oil from OPEC, have been blamed for the sharp decline in oil prices in 2014. Oil prices dropped significantly as a result of the excess supply. Oil prices are influenced by supply and demand, but oil futures actually determine the price. A legally binding contract known as an oil futures contract gives the buyer the right to purchase a barrel of oil at a certain price in the future. The buyer and seller of the oil are required to complete the transaction on the date specified in the contract.
3. Natural Disasters: Another element that may affect oil prices is natural disasters. For instance, the price of oil increased by $13 a barrel when Hurricane Katrina hit the southern United States in 2005, hurting over 20% of the country's oil supply. The Mississippi River's flooding in May 2011 also caused changes in oil prices.
4. Political Instability: Since the Middle East produces the majority of the world's oil supply, political unrest in the region has an impact on oil prices globally. For instance, in July 2008, a barrel of oil cost $128 because of unrest and consumer apprehension over the conflicts in Afghanistan and Iraq.
5. Production Cost and Storage: Oil prices might fluctuate due to production expenses as well. While it costs less to extract oil in the Middle East, it costs more to do so in Canada's oil sands.If the only oil left is in the tar sands, the price might theoretically increase if the supply of cheap oil runs out. The price of oil is also directly impacted by U.S. output. Due to the extreme overstock in the market, a drop in output lowers total supply and raises prices.
6. Interest Rates: One of the fundamental hypotheses contends that as interest rates rise, manufacturers' and consumers' expenditures increase, resulting in less time and money spent driving overall. Less demand for oil results from fewer vehicles on the road, which can lower oil costs. This is what we would refer to as an inverse correlation. According to the same principle, when interest rates fall, people and businesses can borrow and spend money more easily, which increases the demand for oil. More consumers bid up the price of oil the more it is used.

                    

  Figure 2: Oil Price Fluctuations over 2012-2022

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India (Prices in Dollars)

 

 IMPACT OF RISING CRUDE OIL PRICES ON THE INDIAN ECONOMY

●      India has a current account deficit because it imports more than 86% of its oil needs. India's import bill would grow due to the increase in crude oil prices, which will cause the CAD to worsen (difference between import and export).

●      The consumer price index (CPI) is also significantly impacted by rising crude oil prices. As a result, inflation rises in tandem with rising crude oil prices.

●      It is the discrepancy between what the government receives in direct and indirect taxes and what it spends. The price of gasoline won't go up if the government decides not to pass on the increases in crude oil prices to the customer. But, somebody needs to absorb the blow. It will be the Indian government in this instance. That will result in a budget deficit, which is never beneficial to the economy.

●      The RBI will need to raise interest rates in order to contain inflation as a result of rising crude oil prices. It will result in less expenditure, which will slow down the nation's growth.

●       Oil import costs would increase for net oil importers like India as the price of oil rises on the global market. A rise in the price of oil globally will affect the trade deficit. Because of the rise in inflation brought on by rising oil prices, actual GDP growth has been much slower.

●      This connects domestic inflation to global pricing. A typical developing nation like India that is seeing an increase in the price of oil on the global market would see an increase in the general price level as a result of both direct consumption of oil at the higher price and an increase in the cost of producing final goods that utilize oil as an input.

●      If there is not a complete pass-through, an increase in the price of oil internationally will result in a higher oil subsidy, which will increase the government's revenue spending. Additionally, oil prices in India are subsidized, but they also generate significant tax revenues for the federal government and the states. Due to an increase in ad valorem tax collections on oil and petroleum products, which must be netted out to determine the net contribution to the government's oil subsidy, an increase in the price of oil internationally would result in higher revenue receipts.

Source: www.google.com

 

IMPACT OF OIL PRICE FLUCTUATIONS ON EXCHANGE RATES

The terms of trade channel, the wealth effect channel, and the portfolio reallocation channel are three direct transmission pathways of oil prices to exchange rates that have been taken into consideration in the literature (Buetzer et al, 2016). Amano and van Norden introduced the terms of trade channel (1998a, b). The fundamental concept, according to Bénassy-Quéré et al. (2007), is to relate the price of oil to the price level that influences the real exchange rate. The output price of a country A's non-tradable sector will rise in comparison to a country B's non-tradable sector if the former uses more energy than the latter. This suggests that greater inflation causes the currency of country A to really appreciate (Chen and Chen, 2007; Buetzer et al., 2016). 

If the assumption that the price of tradable products is fixed is abandoned, effects on the nominal exchange rate follow. In this situation, purchasing power parity serves as a link between the fluctuations of the nominal exchange rate and inflation (PPP). We anticipate that the tradable currencies of nations with significant oil dependence will fall as a result of greater inflation if the price of oil rises. As the price of the tradable (and non-tradable) commodities mentioned above changes, it will have an effect on how the real exchange rate reacts, depending on how the nominal exchange rate changes. Overall, depending on how prices are adjusted, the causality encoded in the terms of trade channel may persist over various time horizons.

 

 

Figure 3: Oil Price and Exchange Rate Causality

Source: https://www.eia.gov/workingpapers/pdf/oil_exchangerates_61317.pdf

The fundamental concept of the portfolio and wealth channel was first proposed by Krugman and Golub in 1983 and has since been reexamined by Bodenstein et al (2011). The underlying concept is that when the price of oil increases, wealth is transferred to oil-exporting nations (BénassyQuéré et al., 2007). The resulting short-run impact is reflected in the wealth channel, while the medium- and long-term effects are evaluated in the portfolio channel. When oil prices increase, wealth is transferred to oil-exporting nations (in US dollars), which is represented in an increase in exports and a positive current account balance (in local currencies). Because of this, we anticipate that with a rise in oil prices, the currencies of oil-exporting countries will strengthen and the currencies of oil-importers will depreciate effectively (Beckmann and Czudaj, 2013b). If oil-exporting nations reinvest their earnings in US dollar assets, the wealth effect may also create a short-term increase in the value of the US dollar.

 According to the portfolio effect, two factors will have an impact on the US dollar's short- and medium-term movements in relation to the currencies of oil exporters. The first is the US's reliance on oil imports in comparison to the percentage of US exports to nations that produce oil. The second is the relative preference of oil exporters for US dollar assets.

 

Figure 4: Wealth and Portfolio channel

Source: https://www.eia.gov/workingpapers/pdf/oil_exchangerates_61317.pdf

Oil prices have a significant impact on the Indian exchange rate, according to Hidhayathulla et al. (2014) in their study "Relationship between International Crude Oil Price and the Inflation Rate (CPI) in India from 2011 to 2014," but according to Kaushiket (2014) in his study "Oil Prices and Real Exchange Rate," there is no discernible impact of oil price change on the real exchange rate between the Indian rupee and the US dollar. Most often, as the price of crude oil rises, the cost of production inputs follows suit. As a result, prices for goods and services rise as well, which ultimately drives up the country's inflation rate. However, this process doesn't end there; it will also have an impact on consumer purchasing power, global trade, and the value of currencies. In essence, a few factors also have an impact on the price of crude oil. The number of producers, natural disasters, fresh inventories, and customer demand are some of them. In addition, the Indian government has taken several actions to lessen the effects of rising oil costs.

We anticipate that Indian exports would rise as the value of the rupee falls against the major foreign currencies, making items made in India more affordable abroad. Conversely, depreciation raises the cost of imports, which could lead to a decrease in the amount of imports as domestic products and services begin to replace imports due to the rise in the relative cost of imports. In this case, a depreciation of the rupee will raise net exports and hence increase GDP.

The average price of a barrel of Indian crude oil in March 2020 was $33.36 per barrel, down from $66.74 in March 2019. Due to a drop in demand during the pandemic era, crude oil prices have dropped by over two-thirds since the start of the year 2020. The rupee's value has declined against the dollar, nevertheless, offsetting this decline.

 

   Figure 5: Trend in Indian Exchange Rate in respect to Dollars

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India (Prices in Dollars)

IMPACT OF OIL PRICE FLUCTUATIONS ON FOREIGN RESERVES

Talking about foreign reserves, all asset owners, including citizens of oil exporting nations, will be impacted by a decline in asset prices and dividends in countries that import oil because of an increase in the price of crude. On the other hand, asset prices in oil-exporting nations will rise, affecting all asset owners once more, including citizens of oil-importing nations. Therefore, the effect of changes in oil prices on the current account and changes in net foreign assets (NFA) may be mitigated by capital gains and income flows. Usually, the prices of bonds, stocks, and currency rates react considerably more quickly than the costs and quantities of things.

The country's foreign exchange reserves, which are under the custody of the Reserve Bank of India (RBI), have decreased for a fifth week in a row as of April 8. Over these weeks, there was a sizable $28.5 billion decline overall. This has caused considerable anxiety, particularly given the possibility that a protracted Russia-Ukraine crisis may reinforce the trend and result in a significant depletion of reserves, worsening the nation's balance of payments. Between 2019 and September 2021, the growth of India's foreign exchange reserves, which are primarily made up of holdings of foreign currency assets, was constant. The assets making up the remaining 35–40% of India's foreign exchange reserves are held in other global currencies, such as the euro, pound, and yen, albeit they are expressed in dollar terms. The component of foreign currency assets reached $580 billion around the same time as the Forex reserves reached their peak of $642.5 billion for the week ending September 3. In contrast, the reserves' size on August 8 was just over $604 billion, with currency assets totalling about $537 billion. This means that the reserves' decline was primarily the result of a valuation loss brought on by the US dollar's appreciation against other advanced-economy currencies and the RBI's recent sales of dollars to support the rupee. The RBI may stick with its current approach to the currency market up till the cycle of net FPI outflows from the Indian market turns. According to Banerjee, additional significant depletion of the reserves might not occur if oil prices remain stable. However, she noted that a faster depletion of India's reserves should not be ruled out if oil rises to $140 per barrel and capital outflows pick up speed.

For the time being, FPIs won't invest in Indian assets since they are made unattractive by high oil prices, rising US bond yields, and the global strength of the US dollar. Because the rupee offers excellent relative real rates compared to the US dollar, carry traders are still invested in it. Investors can sustain their faith in the currency thanks to the RBI's aggressive actions. The central bank had earlier stated that the market would not determine the value of the rupee. If oil prices remain at $100, the RBI can help to keep the rupee stable. However, if oil prices rise much from here, there could be significant pressure on the rupee to depreciate, according to Banerjee.

 

CONCLUSION

The shocks have consequential impact on the Indian economy. The RBI should therefore acknowledge the significance of macroeconomic variables in the examination of monetary policy. Oil price changes that are unfavourable have a positive long-term impact on output, while also momentarily lowering prices and short-term strengthening of the currency. To control inflation and the exchange rate, the central bank adopts an expansionary monetary policy, which can result in greater output growth. For the Indian context, it is necessary to further investigate how the economy reacts asymmetrically to positive and negative shocks to oil prices.

A medium- to long-term drop in output, demand for money, and the price of oil globally is brought on by rupee depreciation. It briefly increases inflation because of its tiny impact. RBI implements a contractionary monetary policy in an effort to save the domestic currency. The globe shouldn't disregard the global ramifications of rupee fluctuations, which can lead to huge changes in global oil prices.

In order to raise the production potential frontier, the policy of setting an exchange rate at a very competitive level may not be advantageous and may even be quite risky for India. Instead, India should concentrate on structural reforms to address supply-side bottlenecks, particularly in the resource and energy sectors. Examples of such policies include measures to promote exports such optimal resource allocation and permitting private sector participation in the energy sector. For the development of alternative energy technologies that will lessen India's reliance on oil imports, more money must be invested in research and development.

 

REFERENCES

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Ms. Mahek Khanna, MA Economics (batch 21-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. mahekkhannaa@gmail.com