Energy Consumption and Economic Growth in India: A Causality Analysis

Abstract

This article examines the relationship between electricity consumption and economic growth in India for the period of 1970 to 2011. The close relationship between economic growth and electricity consumption suggests that energy policies of a country affect its economic growth. Earlier literature provides four hypothesis on relationship between economic growth and electricity consumption i.e., growth hypothesis, conservative hypothesis, feedback hypothesis and neutrality hypothesis. One of the objectives of this study is to find out which hypothesis is applicable to India. This study is based on secondary data and required data is collected from World Bank database. The main objective of this study is to find out long run relationship and direction of relationship between electricity consumption and economic growth. ADF test is used to find out stationary data series and level of integration between GDP and electricity consumption. Cointegration test is used to find out long run relationship between electricity consumption and economic growth. Granger causality model is used to examine causal effect between electricity consumption and economic growth. This study found that data series of GDP and electricity consumption are non-stationary at its level and stationery at 1st difference. Both the series are integrated with order one i.e. I(1). Result of cointegration test indicates no long run relationship between electricity consumption and GDP. Also, Granger causality test indicates no causal relationship between electricity consumption and GDP. On the basis of findings, it is concluded that electricity consumption does not affect the GDP, so government should focus on gradual shift towards non-renewable sources of energy.