Energy Consumption and Economic Growth in India: A reconciliation of Disaggregate Analysis

Abstract

The present study examines whether energy consumption fuels economic growth or vice versa. The relationship is examined by using the annual data covering the period from 1970 to 2011. By employing the Granger causality test, the study empirically found that it is economic growth that fuels more demand for lignite and electricity consumption and there is growth of any energy variables that causes economic growth. In contrast, the out of sample forecasts in variance decomposition of VAR suggests that there is a bidirectional influence between electricity consumption and economic growth and lignite consumption and economic growth. Whereas a unidirectional influence from GDP growth in a natural gas consumption is found from this result. Therefore, the current study found, mixed and inconsistent results as compared to the previous studies in the Indian context. Moreover, on the basis of two econometric tools, the study with little more belief could suggest for reducing natural gas and oil consumption for boosting higher rates of economic growth in the country.

Key Words: Energy, Consumption, Causality, VAR, Variance Decomposition, Economic growth and India.