Energy security, economic growth and environmental sustainability in India: Does FDI and trade openness play a role?

Abstract

India is one of the world's largest emerging economies and, therefore, has a critical role to play in ensuring global sustainability, while the Indian economy is also prioritizing energy security. The paper explores the dynamic linkages between energy security captured through national-level energy use, foreign direct investment (FDI), economic output, carbon emissions, and trade openness in India spanning the period from 1978 to 2016 in a multivariate framework based on the theoretical premise of an Environmental Kuznets Curve. Time series econometric modelling based on the ARDL model and VECM Granger causality tests are employed for this purpose. The results confirm the presence of a co-integrating relationship and finds a strong energy-output-CO2-FDI long-run nexus. A 1% increase in FDI results in a 0.013% reduction in energy use. Energy use is found to be Granger caused by output, carbon emissions, FDI and trade openness in the long-run. The adoption of energy-efficient techniques through FDI is essential for reducing carbon emissions in India based on our findings. The Indian government should also galvanize FDI inflow in the renewable energy sectors by assuring incentives to investors to concurrently achieve favorable macroeconomic outcomes and ensure sustainable economic development. These are globally important policy lessons for other developing and emerging economies.