Econometric Analysis of Demand for Petrol in India, 1966-2019

Abstract

This study uses single-equation dynamic models to estimate petrol demand in India. Estimated long-run elasticities are higher than their short-run counterparts, which is in line with expectations based on the existing literature. We find price elasticities of -0.418 (long-run) and -0.189 (short run), which indicates that when price increases by 10%, demand tends to reduce by approximately 4% as consumers adjust their consumption behaviour. Prices appear to be more elastic in India rather than USA where studies estimate petrol elasticities to be in the range of -0.02 to -0.04 in the short term. We further find evidence that long-run elasticities are not as high as estimated elsewhere. We address issues around modelling of habit formation, habit persistence, and unobserved heterogeneity. Results are essential for transportation policymaking, especially in the context of taxation, understanding price stability, estimating the effects of duty increases on demand, and the potential implications for carbon taxes. The results are also important for wider policy considerations such as climate protections goals, reducing local emissions, dependency on fossil fuels, and strategic energy security.