Examining the Linkage between Energy Consumption and Economic Growth in India

Abstract

The paper examines whether energy use drives economic growth or vice versa in the Indian context during 1970–71 to 2004–05. Utilizing Granger causality test, the study suggests that it is the economic growth that fuels more demand for both crude oil and electricity consumption and it is the only growth of coal consumption that drives economic growth. When influence of different components of energy on major two components of economic growth is investigated with the same causality test, none of the energy components found to be significantly influencing the two components of economic growth viz. private consumption and investment. In contrast, the variance decomposition analysis of Vector Autoregression (VAR) suggests that there could be a bidirectional influence between electricity consumption and economic growth, other results remaining unchanged. Therefore, the study yields mixed and contradictory result compared to the previous studies in the Indian context. However, on the basis of application of two econometric tools, the study with little more conviction suggests for reducing crude oil and natural gas consumption at least in the consumption sectors, which don’t directly contribute to production or add to capital formation of the economy, for achieving higher rate of growth in the economy.