Shareholder’s wealth creation in India post deregulation of petrol prices

*Dr. Shashank Bhushan Lall

** Shubhadeep Chakraborty

________________________________________________________________________

Abstract: The study examines the effect of deregulation of petrol prices upon the wealth

creation process of the shareholders of the Indian oil marketing companies. The Government

of India has deregulated the petrol prices since 25th June 2010 and has allowed the oil

marketing companies to link the retail selling prices of petrol to the market. The liberty in

fixation of prices has a long lasting impact upon the wealth creation possibility of the

shareholders of the oil marketing companies. International crude prices have off late been

caught in a bearish trend which has pushed the international crude oil prices to new lows.

This has reduced the import cost of crude oil for India and has helped in taming the

inflationary trends in our country. Indian oil marketing companies too have benefited from

this bearish trend as their under recoveries have come down considerably. Efficient cost

management and free pricings of petrol have helped in increasing share price returns and

creation of wealth for the shareholders of these companies. With partial deregulation the

finances of Government of India has improved a lot due to huge savings in oil subsidies. The

results of petrol deregulation is so positive that The Government of India is seriously

contemplating about deregulating the diesel too from her control and make the retail selling

price of diesel market linked.

Key words: Deregulation, Petrol prices, wealth maximization, oil marketing companies

* Dr.. Shashank Bhushan Lall is an Associate Professor at Patna University, Patna.

(E): lallshashankbhushan@gmail.com, (M):+91 94310 77491

**Shubhadeep Chakraborty is an Assistant Professor in the area of Finance at Amity Patna.

(E): shubhadeep7@gmail.com, (M): +91 99312 37224

I. INTRODUCTION:

The Indian oil and gas sector besides being vast has a tremendous macroeconomic

importance as well. It is one of the eight core industries that are the part of the IIP (Index for

industrial production). Petroleum products are the main sources of energy in our country and

in case of industrial production; it is one of the main input components. Any changes in the

price of diesel, petrol etc has a cascading effect upon the overall cost of production and

ultimately the end price of the product. From the macroeconomic point of view, its

importance can be gauged by the fact that every year the Government of India has been

spending astronomical amounts of financial resources by way of paying subsidies to the oil

and gas sector. This sector is one of the heavily subsidized sectors and the main motive of the

Government to do so is to prevent the Indian economy from inflationary shocks arising due to

India’s heavy dependency upon imported crude oil as well as imported inflation. On the other

hand, payment of such huge amounts of subsidies over the years has inflicted considerable

amount of fiscal pains upon the Government of India. In fact oil subsidies have been the

major contributors in high fiscal and current account deficits. It had been suggested since

long that The Government does away with the subsidies and liberalizes the sector so that the

financial burden may be lessened. The Government was unwilling to do so and wanted to

continue subsidizing the sector because she apprehended that by doing away with the

subsides and allowing free pricing, inflation will skyrocket and the common people shall be

over burdened. But mounting fiscal deficits (mainly due to oil subsidies) kept the inflation as

well as the interest rates high, affecting the investment climate in the economy negatively.

Finally the Government of India on the 20th of June 2010, decided to deregulate the Indian oil

and gas sector partially by allowing the free pricing of petrol. Diesel, kerosene and LPG are

still under Government regulation. This decision of the Government has financial and

investment related implications not only for herself but also for the entire Indian oil and gas

sector, her stakeholders as well as the public in general.

In light of the above, it becomes highly imperative to make an attempt to study the impact the

partial deregulation has upon the Government’s revenues, upon the returns and wealth

creation of the share holders of the Government owned oil marketing companies and upon the

overall growth and development of the entire Indian oil & gas industry.

II. OBJECTIVES OF STUDY:

i) To study if deregulation of the Indian oil sector has a positive impact and is successful in

creating a confident future for the Indian oil sector.

ii) To test if deregulation helps in creating wealth and value for the shareholders of the oil

companies by improving the share returns.

III. Hypothesis:

Ho≠ Deregulation will not affect the share prices of the oil marketing companies

H1= Deregulation will affect the share prices of the oil companies strongly

H2= Deregulation will affect the share prices of the oil companies moderately.

IV. REVIEW OF LITERATURE:

The International institute for sustainable development global studies initiatives (2012) has

observed that the current regime of energy subsidies in India is a heavy burden on the

Government’s resources and has only limited success in reaching the intended beneficiaries.

Subsidies also put a lot of pressure on national oil companies and power sector utilities,

which face heavy financial burdens under the current system.

Rangarajan Committee Report (2006) this report recommended that international (or “trade

parity”) prices be used as a reference for a more market-based approach to pricing of petrol

and diesel. It also recommended that subsidized kerosene should be restricted to below

poverty line (BPL) families and the retail price of LPG be raised, with any remaining

subsidies financed directly from the budget.

Kelkar Committee Report, 2012. This report set out a “roadmap for fiscal consolidation”,

including a timeline for the reduction of fuel subsidies. It recommended the elimination of

diesel subsidies over a two-year period followed by full price deregulation in 2014. It also

recommended the elimination of LPG subsidies over a period of three years, and the

reduction of more politically sensitive kerosene subsidies by one-third over the same period.

Parikh Committee Report (2010) has recommended that the prices of petrol and diesel be

fully liberalized, both at refinery gate and at the pump. It also recommended that: (i)

subsidized kerosene sold through the public distribution system (PDS) be targeted to BPL

families, and its price raised each year according to the growth in nominal agricultural GDP

per capita; (ii) the price of kerosene sold outside of the PDS system be set close to that of

diesel to eliminate incentives for diversion; and (iii) subsidized LPG should be quantity

rationed, or replaced by direct cash transfers to BPL households with LPG prices fully

liberalized.

V. Research Methodology:

a) Sources of data:

Secondary source has been used to collect the relevant data. Since the deregulation of petrol

prices on 25th June 2010, petrol prices have undergone 57 (approx.) revisions. All the 57

(approx.) price revisions have been taken into consideration as the average price of petrol in

the four metros (Delhi, Kolkata. Mumbai and Chennai) on the dates of the petrol price

revisions. The petrol price changes pertain to the three Government owned upstream oil

companies and the three Government owned downstream oil companies. The post

deregulation period ranging from 26th June 2010 to 1st July 2014. The share prices have been

sourced from the Bombay Stock Exchange.

b) Statistical tools used are:

Correlation analysis

Regression analysis

Coefficient of determination (R²)

Beta estimation (β)

IV. ANALYSIS:

a) Calculation of correlation between petrol prices and market price per share of

Indian Oil Corporation after deregulation (26/06/2010 to 15/08/2014): X (x-xµ) Y (Y-Yµ) (x-xµ)² (Y-Yµ)² ∑((x-xµ)(Y- Yµ)

75.03

78.42

76.42

76.31

77.19

78.16

77.41

76.79

75.84

75.33

76.77

80.71

78.68

75.75

74.88

72.96

73.32

71.04

68.55

67.61

67.26

70.38

71.62

72.68

72.68

75.17

73.42

71.56

71.87

4.36

7.75

5.75

5.64

6.52

7.49

6.74

6.12

5.17

4.66

6.1

10.04

8.01

5.08

4.21

2.29

2.65

0.37

-2.11

-3.05

-3.40

-0.28

0.95

2.01

2.01

4.50

2.75

0.89

1.20

254.20

351.5

373.2

240.71

255.19

296.63

250.11

230.5

203.7

206.1

204.9

232.65

209.35

195.75

227

212.65

234.55

252.2

285.7

265.56

216.65

246.32

284.35

283.68

316.95

298.8

314.9

348.95

296.35

-21.1

76.2

97.9

-34.59

-20.11

21.33

-25.19

-44.8

-71.6

-69.2

-70.4

-42.65

-65.95

-79.55

-48.3

-62.65

-40.75

-23.1

10.4

-9.74

-58.65

-28.98

9.05

8.38

41.65

23.5

39.6

73.65

21.05

19.00

60.06

33.09

31.89

42.54

56.21

45.46

37.51

26.80

21.78

37.21

100.90

64.16

25.85

17.74

5.26

7.03

0.13

4.48

9.31

11.57

0.08

0.90

4.05

4.05

20.27

7.60

0.79

1.44

445.21

5806.44

9584.41

1196.468

404.4121

454.9689

634.5361

2007.04

5126.56

4788.64

4956.16

1819.023

4349.403

6328.203

2332.89

3925.023

1660.563

533.61

108.16

94.8676

3439.823

839.8404

81.9025

70.2244

1734.723

552.25

1568.16

5424.323

443.1025

-91.996

590.55

562.925

-195.088

-131.117

159.7617

-169.781

-274.176

-370.172

-322.472

-429.44

-428.206

-528.26

-404.114

-203.343

-143.469

-107.988

-8.547

-21.944

29.707

199.41

8.1144

8.5975

16.8438

83.7165

105.75

108.9

65.5485

25.26

71.79

71.47

72.60

72.31

72.98

72.98

72.37

71.53

74.47

74.70

76.79

68.97

69.77

72.08

70.21

66.95

66.65

61.47

61.82

59.22

56.12

55.79

55.78

55.02

54.73

54.63

1.12

0.80

1.93

1.64

2.31

2.31

1.7

0.86

3.80

4.03

6.12

-1.7

-0.89

1.41

-0.45

-3.71

-4.01

-9.2

-8.84

-11.45

-14.54

-14.88

-14.88

-15.65

-15.93

-16.03

281.43

215.64

346.97

311.05

280.25

301

284.7

255

263.2

313.88

331

233.45

278

400.25

378.15

370.88

364

302.5

309.45

288.43

223.68

216.55

274.98

264.3

261

203

6.13

-59.66

71.67

35.75

4.95

25.7

9.4

-20.3

-12.1

38.58

55.7

-41.85

2.7

124.95

102.85

95.58

88.7

27.2

34.15

13.13

-51.62

-58.75

-0.32

-11

-14.3

-72.3

1.26

0.64

3.75

2.69

5.34

5.35

2.89

0.74

14.47

16.28

37.45

2.89

0.79

1.99

0.20

13.78

16.10

84.64

78.18

131.10

211.48

221.41

221.63

244.92

253.84

257.04

37.5769

3559.316

5136.589

1278.063

24.5025

660.49

88.36

412.09

146.41

1488.416

3102.49

1751.423

7.29

15612.5

10578.12

9135.536

7867.69

739.84

1166.223

172.3969

2664.624

3451.563

0.1024

121

204.49

5227.29

6.8656

-47.728

138.3231

58.63

11.4345

59.367

15.98

-17.458

-45.98

155.4774

340.884

71.145

-2.403

176.1795

-46.2825

-354.602

-355.687

-250.24

-301.886

-150.339

750.5548

874.2

4.7616

172.15

227.799

1158.969

Xµ=∑X/N

= 3887.212/55

∑(x-xµ)=

0.29

Yµ=∑Y/N

=15141.84/55

∑(Y-Yµ)=

0.34

∑(x-xµ)²=

2526.64

∑(Y-Yµ)² =

145345.32

∑((x-xµ)(Y- Yµ)=

785.0892

=70.67 = 275.30

Corr (x, y) = 0.04

b)Calculation of regression coefficient with the above variables:

Testing Y on X=0.310

Testing X on Y=0.0054, Coefficient of regression = √0.310* 0.0054 = 0.040

C)Calculation of coefficient of determination:

(r) ²= (0.04)² = 0.0016

d) Calculation of Beta (β):

β = Cov (y, x) / ∑(x-xµ) ²

β = 785.0892 / 2526.64 = 0.310

b) Calculation of correlation between petrol prices and market price per share of

Hindustan Petroleum Corporation limited after deregulation (26/06/2010 to

15/08/2014):

X (x-xµ) Y (Y-Yµ) (x-xµ)² (Y-Yµ)² ∑((x-xµ)(Y- Yµ)75.05

78.08

76.39

76.3

77.14

78.13

77.38

76.76

75.82

75.32

76.77

80.72

4.4

7.43

5.74

5.65

6.49

7.48

6.73

6.11

5.17

4.67

6.12

10.07

414

425

455.15

302.3

303.15

264.45

250.32

227.4

229.45

206

190.45

187

109.33

120.33

150.48

-2.37

-1.52

-40.22

-54.35

-77.27

-75.22

-98.67

-114.22

-117.67

19.36

55.20

32.94

31.92

42.12

55.95

45.29

37.33

26.72

21.80

37.45

101.40

11953.05

14479.31

22644.23

5.6169

2.3104

1617.648

2953.923

5970.653

5658.048

9735.769

13046.21

13846.23

481.052

894.0519

863.7552

-13.3905

-9.8648

-300.846

-365.776

-472.12

-388.887

-460.789

-699.026

-1184.94

78.68

75.75

74.88

72.98

73.33

71.05

68.53

67.63

67.26

70.36

71.61

72.67

72.66

75.15

73.4

71.56

71.87

71.8

71.5

72.58

72.29

73.01

73.01

72.4

71.51

74.48

74.68

76.78

68.98

69.78

8.03

5.1

4.23

2.33

2.68

0.4

-2.12

-3.02

-3.39

-0.29

0.96

2.02

2.01

4.5

2.75

0.91

1.22

1.15

0.85

1.93

1.64

2.36

2.36

1.75

0.86

3.83

4.03

6.13

-1.67

-0.87

267

200.05

233.05

244.98

253.8

261.8

281.3

307.15

314.85

285.95

285.95

308.54

305.1

302.45

310.1

362.85

325.85

341.85

294.9

302.65

317.45

337.45

341.85

346.15

335.05

301.3

350

368.31

199.6

469.82

-37.67

-104.62

-71.62

-59.69

-50.87

-42.87

-23.37

2.48

10.18

-18.72

-18.72

3.87

0.43

-2.22

5.43

58.18

21.18

37.18

-9.77

-2.02

12.78

32.78

37.18

41.48

30.38

-3.37

45.33

63.64

-105.07

165.15

64.48

26.01

17.89

5.42

7.18

0.16

4.49

9.12

11.49

0.08

0.92

4.08

4.04

20.25

7.56

0.82

1.48

1.32

0.72

3.72

2.68

5.56

5.56

3.06

0.73

14.66

16.24

37.57

2.78

0.75

1419.029

10945.34

5129.424

3562.896

2587.757

1837.837

546.1569

6.1504

103.6324

350.4384

350.4384

14.9769

0.1849

4.9284

29.4849

3384.912

448.5924

1382.352

95.4529

4.0804

163.3284

1074.528

1382.352

1720.59

922.9444

11.3569

2054.809

4050.05

11039.7

27274.52

-302.49

-533.562

-302.953

-139.078

-136.332

-17.148

49.5444

-7.4896

-34.5102

5.4288

-17.9712

7.8174

0.8643

-9.99

14.9325

52.9438

25.8396

42.757

-8.3045

-3.8986

20.9592

77.3608

87.7448

72.59

26.1268

-12.9071

182.6799

390.1132

175.4669

-143.681

72.09

70.2

66.95

66.65

61.45

61.78

59.18

56.09

55.77

55.74

54.99

54.69

54.59

1.44

-0.45

-3.7

-4

-9.2

-8.87

-11.47

-14.56

-14.88

-14.91

-15.66

-15.96

-16.06

485.66

480

330.56

384.65

289.77

311.88

315.66

243.65

310.22

308

265.55

221.12

198.65

180.99

175.33

25.89

79.98

-14.9

7.21

10.99

-61.02

5.55

3.33

-39.12

-83.55

-106.02

2.07

0.20

13.69

16

84.64

78.67

131.56

211.99

221.41

222.30

245.23

254.72

257.92

32757.38

30740.61

670.2921

6396.8

222.01

51.9841

120.7801

3723.44

30.8025

11.0889

1530.374

6980.603

11240.24

260.6256

-78.8985

-95.793

-319.92

137.08

-63.9527

-126.055

888.4512

-82.584

-49.6503

612.6192

1333.458

1702.681

Xµ=∑X/N

= 3886.20/55

= 70.65

∑(x-xµ)=

0.45

Yµ=∑Y/N=

16757.19/55=304.67

∑(Y-Yµ)

= 0.34

∑(x-xµ)²=

2528.9

∑(Y-Yµ)² =

278287.7

∑((x-xµ)(Y- Yµ)=

2024.14

Corr (x, y) = 0.0763

B) Calculation of regression coefficient with the above variables:

Testing Y on X

byx= 111327.7-0.153/ 139089.5-.2025= 0.80

Testing X on Y

bxy= 111327.7-0.153 / 15305823.38= 111327.54/15305823.38= 0.0072

Coefficient of regression: √0.80 * 0.0072 = √0.00576 = 0.075

C) Calculation of coefficient of determination:

(r) ²= (Co efficient of correlation) ²

(r) ²= (0.0763)² = 0.00582

D) Calculation of Beta (β):

β = Cov (y, x) / ∑(x-xµ) ²

β =2024.14/ 2528.9= 0.80

C) Calculation of correlation between petrol prices and market price per share of

Bharat Petroleum Corporation limited after deregulation (26/06/2010 to 15/08/2014):

X (x-xµ) Y (Y-Yµ) (x-xµ)² (Y-Yµ)² ∑((x-xµ)(Y- Yµ)

75.10

78.09

76.40

76.33

77.15

78.12

77.37

76.72

75.77

75.27

76.72

80.67

78.62

75.72

74.85

72.95

73.31

71.03

68.53

67.58

4.46

7.45

5.76

5.69

6.51

7.48

6.73

6.08

5.13

4.63

6.08

10.03

7.98

5.08

4.21

2.31

2.67

0.39

-2.11

-3.06

613591.8

627.6

435.25

446.65

377.65

376.98

364.91

343.8

355.6

326.4

378.46

363.87

356.36

340.35

361.41

429.6

401.42

395.79

391.03

371.56

224.5

203.3

239.1

46.75

58.15

-10.85

-11.52

-23.59

-44.7

-32.9

-62.1

-10.04

-24.63

-32.14

-48.15

-27.09

41.1

12.92

7.29

2.53

19.8916

55.5025

33.1776

32.3761

42.3801

55.9504

45.2929

36.9664

26.3169

21.4369

36.9664

100.600

63.6804

25.8064

17.7241

5.3361

7.1289

0.1521

4.4521

9.3636

50400.2

41330.8

57168.8

2185.56

3381.42

117.722

132.710

556.48

1998.09

1082.41

3856.41

100.801

606.636

1032.98

2318.4

733.868

1689.21

166.926

53.1441

6.4009

1001.27

1514.58

1377.21

266.007

378.556

-81.158

77.5296

143.427

229.311

152.327

377.568

100.701

196.547

163.271

202.712

62.5779

109.737

5.0388

15.3819

-7.7418

67.23

70.35

71.6

72.65

72.64

75.14

73.39

71.55

71.86

71.79

71.49

72.59

72.29

72.97

72.97

72.37

71.52

74.47

74.67

76.75

68.95

69.77

72.07

70.17

66.92

66.62

61.42

61.76

59.16

56.06

55.76

-3.41

-0.29

0.96

2.01

2

4.5

2.75

0.91

1.22

1.15

0.85

1.95

1.65

2.33

2.33

1.73

0.88

3.83

4.03

6.11

-1.69

-0.87

1.43

-0.47

-3.72

-4.02

-9.22

-8.88

-11.48

-14.58

-14.88

380.12

377.9

361.3

368.49

386.4

380.15

399.23

381.6

345.36

328.5

348

357.65

359.6

365.85

372.87

372.5

368.78

347.13

381.29

362.12

377.53

389.63

401.11

390.1

384.45

391.25

395

395.75

390.07

385.78

-16.94

-8.38

-10.6

-27.2

-20.01

-2.1

-8.35

10.73

-6.9

-43.14

-60

-40.5

-30.85

-28.9

-22.65

-15.63

-16

-19.72

-41.37

-7.21

-26.38

-10.97

1.13

12.61

1.6

-4.05

2.75

6.5

7.25

1.57

-2.72

11.6281

0.0841

0.9216

4.0401

4

20.25

7.5625

0.8281

1.4884

1.3225

0.7225

3.8025

2.7225

5.4289

5.4289

2.9929

0.7744

14.6689

16.2409

37.3321

2.8561

0.7569

2.0449

0.2209

13.8384

16.1604

85.0084

78.8544

131.790

212.576

221.414

286.963

70.2244

112.36

739.84

400.400

4.41

69.7225

115.132

47.61

1861.06

3600

1640.25

951.722

835.21

513.022

244.296

256

388.878

1711.47

51.9841

695.904

120.340

1.2769

159.012

2.56

16.4025

7.5625

42.25

52.5625

2.4649

7.3984

57.7654

2.4302

-10.176

-54.672

-40.02

-9.45

22.9625

9.7643

-8.418

-49.611

-51

-78.975

50.9025

-67.337

52.7745

27.0399

-14.08

75.5276

166.721

44.0531

44.5822

9.5439

1.6159

-5.9267

-5.952

16.281

-25.355

-57.72

-83.23

22.8906

40.4736

55.73

54.98

54.7

54.6

-14.91

-15.66

-15.94

-16.04

387

397.03

378.03

310.68

-1.5

8.53

-10.47

-77.82

222.308

245.235

254.083

257.281

2.25

72.7609

109.620

6055.95

22.365

-133.58

166.891

1248.23

Xµ=∑X/N

3885.26/55

= 70.64

∑(x-xµ)=

= 0.06

Yµ=∑Y/N

21367.74/54

= 388.50

∑(Y-Yµ)=

= 0.24

∑(x-xµ)²==

2527.17

∑(Y-Yµ)² =

190168.03

∑((x-xµ)(Y- Yµ)=

3303.729

Corr (x, y) = 3303.729/21922.31 = 0.150

b) Calculation of regression coefficient with the above variables:

Testing Y on X

byx= 181705.09−0.0144/ 138994.35−(0.0036)= 181705.07/138994.34= 1.3

Testing X on Y

bxy= 181705.07/ 10459241.65−.0576= 0.017

Coefficient of regression: √1.3*0.017 = √0.00221 = 0.148

c) Calculation of coefficient of determination:

(r) ²= (Co efficient of correlation) ²

(r) ²= (0.150)² = 0.0225

d) Calculation of Beta (β):

β = Cov (y, x) / ∑(x-xµ) ²

β =3303.729/2527.17= 1.30

Analysis:

1) Indian oil corporation:

Indian Oil Corporation has a positive correlation coefficient of 0.04, which means that the

market price of the shares of Indian Oil Corporation responds positively to the changes in the

prices of the petrol prices. This correlation though positive, is very weak. The reason for the

weakness is the fact that as of now, only prices of petrol has been deregulated. Prices of

diesel and LPG are still under regulation of the Government. The price of a share is the

function of the present value of the future earnings. Once when these two products too get

decontrolled, the earnings of the company shall increase manifold times and this will enhance

the share prices of the oil companies and make the correlation stronger. Regression analysis

of Y upon X reveals that its coefficient is 0.040. Where, Y = Market price of the share and

X= petrol prices. Moreover, besides the cash flows generating from the pricing of the

products, share prices depend upon a number of factors like operating costs, interest

commitments, operating profits, net profits etc. The coefficient of determination (R) ² for

Indian Oil Corporation is 0.0016. This highlights the extent change in petrol prices explains

the change in market price of the share of IOC. Beta estimation (β) gives a figure of 0.31;

which means that the market share price of IOC is 31% sensitive to the changes in the petrol

price changes. Beta coefficient is expected to change (+/-) once the share prices fully reflect

the change in earning of the company factored in by the complete deregulation of diesel and

LPG.

2) Hindustan petroleum corporation limited:

Indian Oil Corporation has a positive correlation coefficient of 0.0763, which means that the

market price of the shares of Hindustan Petroleum Corporation limited responds positively to

the changes in the prices of the petrol prices. This correlation though positive, is very weak.

The reason for the weakness is the fact that as of now, only prices of petrol has been

deregulated. Prices of diesel and LPG are still under regulation of the Government. The price

of a share is the function of the present value of the future earnings. Once when these two

products too get decontrolled, the earnings of the company shall increase manifold times and

this will enhance the share prices of the oil companies and make the correlation stronger.

Regression analysis of Y upon X reveals that its coefficient is 0.075. Where, Y = Market

price of the share and X= petrol prices. Moreover, besides the cash flows generating from the

pricing of the products, share prices depend upon a number of factors like operating costs,

interest commitments, operating profits, net profits etc. The coefficient of determination (R) ²

for HPCL is 0.00582. This highlights the extent change in petrol prices explains the change

in market price of the share of HPCL. Beta estimation (β) gives a figure of 0.80; which

means that the market share price of HPCL is 80% sensitive to the changes in the petrol price

changes. Beta coefficient is expected to change (+/-) once the share prices fully reflect the

change in earning of the company factored in by the complete deregulation of diesel and

LPG.

3) Bharat petroleum corporation limited:

Bharat Petroleum Corporation limited has a positive correlation coefficient of 0.150, which

means that the market price of the shares of Bharat Petroleum Corporation limited responds

positively to the changes in the prices of the petrol prices. This correlation though positive, is

very weak. The reason for the weakness is the fact that as of now, only prices of petrol has

been deregulated. Prices of diesel and LPG are still under regulation of the Government. The

price of a share is the function of the present value of the future earnings. Once when these

two products too get decontrolled, the earnings of the company shall increase manifold times

and this will enhance the share prices of the oil companies and make the correlation stronger.

Regression analysis of Y upon X reveals that its coefficient is 0.148. Where, Y = Market

price of the share and X= petrol prices. Moreover, besides the cash flows generating from the

pricing of the products, share prices depend upon a number of factors like operating costs,

interest commitments, operating profits, net profits etc. The coefficient of determination (R) ²

for BPCL is 0.0225. This highlights the extent change in petrol prices explains the change in

market price of the share of BPCL. Beta estimation (β) gives a figure of 1.30; which means

that the sensitivity of market price per share of BPCL’s share is highly sensitive to the

changes in the petrol price changes. Beta coefficient is expected to change (+/-) once the

share prices fully reflect the change in earning of the company factored in by the complete

deregulation of diesel and LPG.

On the basis of the above analysis, the alternate hypothesis that deregulation will affect the

share prices of the oil companies moderately is being proved and accepted , while the null

hypothesis that deregulation will not affect the share prices of the oil marketing companies, is

rejected.

V.CONCLUSION & SUGGESTIONS:

After attempting a study of the post deregulation (partial) era of the Indian petroleum sector,

the conclusion which has been arrived at is that deregulation is beneficial for the

stakeholders, as the increase in price of the petrol products does increase the market price of

the shares of the oil companies. Deregulation also creates wealth for the stakeholders of the

oil companies and more importantly, it reduces the financial burden of subsidies from the

shoulders of the Government. The time is best suited for the Petrol and diesel markets to be

decontrolled by the Government of India. The Government should gradually increase current

maximum prices for products so as to ease the transition to higher and somewhat more

permanent price ceilings. Increasingly liberalised petroleum and diesel markets would

represent a significant step in reducing the massive cost of product subsidies for the

Government of India.

It is hereby suggested that:

I.The Government decontrols the entire Indian oil sector and gives liberty to the oil

marketing companies to fix the retail prices as per the interaction of forces of demand and

supply and alignment of the international prices.

II. Do away completely with the subsidy payments

III. Use the money so saved for other growth oriented sectors and schemes so that domestic production can be increased and we can have an export edge thereby reducing the balance of payments.

REFERENCES:

1. Kumar, M. (2013), “Return and Volatility Spill over between Stock Prices and Exchange

Rates: Empirical Evidence from IBSA Countries”, International Journal of Emerging

Markets, No. 8(2).

2. Krugman, P. (1983b), Oil Shocks and Exchange Rate Dynamics in Exchange Rates

and international Macroeconomics

3. Dr. Anshul Sharma et al, Impact of crude oil price on Indian economy:

INTERNATIONAL JOURNAL OF SOCIAL SCIENCE& INTERDISCIPLINARY

RESEARCH Vol.1 No. 4, April 2012, ISSN 2277 3630

4. Chemin, Elodie Sentenac (2012),“Is the price effect of fuel consumption symmetric?

Some evidence from an empirical study”, Energy Policy, 41, 59-65.

5. Reserve Bank of India (2011), Price Situation, Reserve Bank of India Monthly Bulletin,

May 2011, pp 636-45.

6. Kumar, Surender, the Macroeconomic Effects of Oil Price Shocks: Empirical Evidence

for India (2005)

7. Lescaroux, F. and V. Mignon. (2008), “On the Influence of Oil Prices on Economic

Activity and Other Macroeconomic and Financial Variables”, OPEC Review, No. 324.

8. Taylor, P. Mark (1999). “Real interest rates and macroeconomic activity”, Oxford Review

of Economic Policy, 15, 2, 95-113.

9. Interest Rates and Economic Activity Deepak Mohanty, Executive Director, Reserve

Bank of India, 23 August 2013

10. Bernanke, Ben and Alan Blinder (1995), “Inside the Black Box: The Credit Channel of

Monetary Transmission”, Journal of Economic Perspectives, 9, 27 – 48

11. National Institute of Public Finance and Policy (NIPFP) (2005), Modeling Economic

Impact of Oil Price Changes on Indian Economy: Methods and Applications.

12. Bacon, Robert, and Masami Kojima. 2006a. Coping with Higher Oil Prices.

13.Bernanke, B ., Gertler, M . And M. Watson. (1997).Systematic Monetary Policy and

the Effect of Oil Price Shocks, Brookings Papers on Economic Activity 1: 91-142.

14.Hunt, R., P. Isard and D. Laxton (2002) ‘The Macroeconomic Effects of Higher Oil

Prices' National Institute Economic Review no 179 January 2002

15.Ojha, V., S. Pohit, and B. Pal. 2009. Climate Change Impact on the Indian

Economy-A CGE 19. Ojha, V. et al. 2009. Social Accounting Matrix for India.

Proceedings of the 17th International

16.Jimenez Rodriguez, R. and M. Sánchez. (2004). Oil Price Shocks and Real GDP

Growth: Empirical Evidence for Some OECD Countries, E C B Working Paper Series,

no. 362. 16.

17. Kaufmann, R. (2003). The Short Run Outlook for World Oil Prices, P r e s e

n t a t i o n f o r t h e U N P r o j e c t

18. Interest rates & economic activity: Reference from the Speech by Shri Deepak Mohanty,

Executive Director, Reserve Bank of India, delivered to the Association of Financial

Professionals of India (AFPI), Pune, August 23, 2013.

19. Shubhadeep Chakraborty: Paper presentation on Strategies of sustainability & growth

amidst the prevailing economic uncertainties in India in conference organized by IES’s

Management college & research centre, Mumbai. 2013

20. Pradeep Agrawal: India’s petroleum demand: Empirical projections & demand for the

future. IEG working paper No. 319, 2012.