Modelling Food and Nonfood Production in India: The Effects of Oil Price using Bayer-Hanck Combined Cointegration Approach

This study investigates the role of oil price in agricultural productivity for India by incorporating land, employment, gross capital formation and inflation using annual time series data for the period 1985 to 2017. Having applied the recently developed cointegration technique by Bayer and Hanck (2013), which combines four major cointegration tests, significant long-run relationships are confirmed among the investigated variables. The long-run results show that the effect of oil price on both food and non-food agricultural production is insignificant but there is a short-run and long-run positive effect of gross capital formation on agricultural production. The inflation has a negative effect on agricultural production only in the short-run. Our finding suggests that capital formation drives the agricultural sector in India, and not oil input. The VECM Granger causality result shows that there is no causal relationship between oil price and agricultural production but bi-directional causality runs between gross capital formation and agricultural production. In addition, oil price has causal effect on capital formation. The study, therefore, implies that agricultural sector will cope in the case of oil price crises because its productivity is independent of oil price changes.