Macroeconomic Policy Trade-offs: Fuel Price Dynamics and Industrial Production Growth in India

Abstract

This research investigates the complex interplay between fuel inflation, industrial production growth, and overall inflation in India, given the economy's high dependence on fuel imports. Using monthly time-series data from April 2012 to December 2023 for Crude Oil Price (COP) inflation, Index for Industrial Production (IIP) growth, and Consumer Price Index (CPI) inflation, the study applies Autoregressive Distributed Lag (ARDL) modelling and Granger Causality testing to analyse these relationships. The findings reveal a significant trade-off between crude oil prices and industrial production. ARDL results show long-run co-integration among the variables, with COP positively impacting IIP but having an insignificant relation with CPI. Conversely, IIP negatively impacts CPI. The Granger Causality test confirms a bidirectional causal relationship between COP and IIP. These results highlight a difficult trade-off for policymakers, suggesting that diplomatic efforts to minimise global fuel price volatility are crucial for managing domestic economic stability.