Keeping in view the current state of thr Indian economy and the recent trends in oil prices, this article first considerers the impact of a permanent oil price shock in a demand deficient economy. Second, the analysis focuses on the consequences of the shock in the absence of any slack. Third, it discusses if changes in the global economic scenario accompanying the oil shock call for a modification of the result of the analysis.
With crude prices soaring by more than 350 percent over the last two and a half years, the goverment has been facing some seemingly intractable policy issues. The most important of these relate to subsidisation of petroleum product, sharing of the burden of subsidy, and appropriate measures for tackling petroinflation.
