Fuel Price Deregulation and Firm-level Mark-up: A Case of Indian Agriculture and Food Processing Firms

Reduction in oil price due to deregulation through the input channel significantly impacts the firm performance in Indian agricultural and food processing firms (AFPFs). The existing theoretical literature suggests that an international oil price shock, in terms of a significant reduction in oil price, enhances firm-level mark-up through higher productivity. However, the empirical estimates of oil price shock on product prices are asymmetric in nature. Thus, this study examines the two-sided effects (demand vs. supply side) of oil price shock on firm-level mark-ups using panel data of 2036 Indian AFPFs over the 1987–2018 period. The study adopts the firm and industry year fixed-effect models, suggesting the dominance of supply-side effects over demand-side effects. Using a quasi-experimental approach and applying the Difference-in-Difference model, we find that post-2014, due to a significant dip in international oil price and parallel deregulation of fuel prices in India, there is a differential impact on firm-level mark-ups between large-sized versus small-sized firms. Our findings are also consistent across various robustness tests. Eventually, the article suggests that the structural bottlenecks hinder the small-sized firms from drawing the benefits of enhanced mark-up following the reduction in oil price compared to their larger counterparts, post-2014 period. JEL Codes: L11, L25, C21, Q13