CONCLUSION
5. Conclusion
The research was conducted complying with a predefined set of tools, techniques, and methods. It was accomplished without exceeding the limit of time and other resource allocated for this purpose. This chapter sets out to throw light as to what degree the study has succeeded in meeting research objectives and how it can be applied to managerial level. It is followed by detailed identifications of future prospects of research based on the current study. Finally, the researcher draws attention to some of the drawbacks of the research project along with an assessment of their impact on overall reliability and significance of key findings.
5.1. Research Objectives and Hypothesis
The primary research objective was to assess the relationship between oil price and the economy of oil importing countries based on the case study of India. From theoretical information collected in the literature review and statistical analysis (Stafford, 2015; Scott, 2015; Goldenberg, 2016; Arnold, 2008; Hensher, Rose, & Greene, 2005), it is established that oil price has an impact on the macroeconomic environment of the world. These findings support the first hypothesis. To confirm the impact of declining oil prices on the macroeconomic environment of India or oil importing nations in general, it is important to assess its implications of different economic indicators in India.
Four indicators i.e. GDP growth rate, inflation, the balance of payment, and currency exchange rate were selected as dependent variables depending on changes in oil price that is the independent variable. All dependent variables are regressed against changes in oil prices through multiple linear regressions (4 in total). A timeframe of 29 years was selected, and the changes were felt with a lag of one year each. Hence, 29 observations were selected.
As for hypothesis relating to the impact of oil price on Indian GDP, there is evidence from short term trend on Statistia (2016), and Trading Economics (2016a) that a negligible negative relationship exists between oil price and Indian GDP. However, statistical analysis of long term observation does not support these findings. Furthermore, there is also disagreement on the direction of the relationship between statistical analysis and literature review. Statistical findings are indicative of positive proportionality, while Mehra (2008), identifies a negative relationship following a general perception. Conclusively, triangulation does not support this hypothesis (impact of oil price on Indian Economy).
For the hypothesis dealing with the relationship between oil price and inflation, the research model was not found to be reliable while checked through F-Test. However, key findings suggest that oil price has a negative impact on inflation rate in India, which is also backed by existing literature on this particular case though with the minor difference of opinion (Trading Economics, 2016b; World Bank, 2015). Therefore, this hypothesis is supported by major part of findings and can be generalized.
Statistical analysis also confirms the validity of the hypothesis discussing the implications of fluctuation in oil price on current account balance, according to which there is a strong negative relationship between oil price and balance of payment in India. Theoretical data and short term trends provided in literature review are also in strong agreement with these results (PTI, 2016; Verma, 2016). Hence, this hypothesis is accepted based on these findings.
Analysis of observation also shows that oil prices directly influence the value of Indian currency. Short term relationship between oil price and Indian currency is also in a similar direction and of same intensity (XE, 2016; Trading Economics, 2016b). By the same token, scholarly data also supports these findings and provides sufficient base for accepting this hypothesis (Bhasker, 2015; World Bank, 2015).
Since the majority of hypotheses tested on the statistical scale and synthesized with existing literature are accepted, the hypothesis that oil prices have an impact on the economy of oil importing nations on the macroeconomic level is also accepted. By generalizing the findings of the case study of India, it is appropriate to conclude that changes in oil prices have an impact on oil importing nations on a macroeconomic level.
5.2. Managerial Implications
Top management of all small, medium and large companies, enterprises or any other types of businesses and organizations have much to learn from the key findings of the study in hand. For example, members of the marketing and strategic management can shape their policies according to actual and forecasted moves in oil prices.
For example, since oil price is in direct relationship with inflation rate in oil importing nations, it is not a good idea to go with aggressive growth strategy as the oil price is declining (The China Post, 2015; Duncan, 2015; Galbraith & Berner, 2001; Hunt, Isard, Laxton, & International Monetary Fund, 2001; World Bank, 2015). There is not the case in establishing new manufacturing plants or introducing new product lines when prices of goods and services are already undergoing a decline.
Furthermore, there are also indications for financial institutions. Strategic management of such institutions should also keep the focus on defensive strategies as oil prices are declining. They should keep their reserve in foreign currency or USD while envisioning decline in oil prices and vice versa. It would be called active hedging. They can also adopt passive hedging tools to avoid the impact of fluctuations in oil prices on their profitability (the study suggests that oil prices are in direct relationship with interest rates, foreign investment, and especially currency value in oil importing countries).
5.3. Future Research Directions
Current research project opens up doors to further exploration and investigation into the ideas and concepts relating to the underlying case of the study. For example, it provides a platform to conduct research on the impact of oil prices on specific industries in oil importing countries such as cement, manufacturing, or service sectors. Primary, as well as secondary methods of research, can be utilized for these types of studies.
Similarly, there can be a study conducted to assess the implications of falling oil price (specifically) on oil importing and exporting nations. A comparative analysis can be held for this purpose between the case studies of India and Saudi Arabia for this purpose. Then, researchers should also consider conducting a comparative analysis of the same kind as mentioned to evaluate the impact of rising oil price.
Then, it is also a feasible idea to investigate into the mediating impact of different factors while analyzing the relationship between oil price and different economic indicators of oil importing countries. A current case study of India can be considered the base for this purpose in the background of mediating effect of correlation between different variables such as the relationship between GDP and currency exchange rate, and inflation rate and employment rate.
5.4. Recommendations
On the basis of key findings, the researcher has generated a few practical recommendations for different entities in oil importing countries that come under the impact of fluctuations in oil price. These recommendations are provided as follows:
5.4.1. Recommendations for government
The government of oil importing nations should manage its spending in inverse proportion to changes in oil prices to balance the inflation rate. For example, when prices are declining, the government should enhance spending so that it may offset lowering inflation rate. On the other hand, it is recommended to decrease spending while faced with opposite scenario (increasing oil prices).
The government should also increase or cut subsidy on petroleum concerning changes in oil prices. For example, the current decision of Indian government to cut subsidy on petroleum products is considered wise on macroeconomic level despite its negative implications on end-users. It would keep prices stable and not let them come down sharply to become an indicative of deflation that can further threat to a currency value and inflow of foreign investment (and thus current account balance) (Word Bank, 2015).
5.4.2. Recommendations for Financial Institutions
Banks and other financial institutions should deal in foreign currency when oil prices are predicted to decline. It will not only help them offset the impact of declining oil prices on the value of the domestic currency, but they can also achieve potential benefits while having foreign currency in reserve (as the value USD increases against INR in such situation). However, they are recommended to act opposite while oil price is on the increase.
5.4.3. Recommendations for Other Companies
The companies that heavily depend on oil for manufacturing should avoid aggressive growth strategies, as low prices may lead to a price war among different manufacturers that is discouraging to business expansion.
As the oil price increases, they can expand to get benefit through ‘economy of scale’ (by increasing the frequency of sales to offset declining profit margins). However, they will have to boost the demand for their products and services through effective marketing and advertising strategies. They may also raise the price to add further to profitability, as competitors are likely to increase prices to manage manufacturing expenses.
5.5. Limitations
Despite the fact that the researcher is successful in achieving the research objectives and it addresses all predefined hypotheses, there are also some limitations of the underlying research. These drawbacks are stated as follows:
It is unknown whether or not the dependent variables like GDP, inflation, and balance of payments are measured accurately (without any under or overstatement).
Sample size of observations (29) is small mainly because relevant data regarding the chosen economic indicators before 1987 is not available from authentic sources (considered for this research).
There were simply four linear regressions evaluating the impact of oil price on four dependent variables. But the correlation between these variables and mediating impact of external factors that can be crucial contributors is totally ignored.
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