Impact of industrialization, urbanization, and financial development on energy consumption: Empirical evidence from India

• Author: Malayaranjan Sahoo,Narayan Sethi
• Published date: 01 August 2020
• DOI: http://doi.org/10.1002/pa.2089
• Date: 01 August 2020

ACADEMIC PAPER

Impact of industrialization, urbanization, and financial

development on energy consumption: Empirical evidence

from India

Malayaranjan Sahoo | Narayan Sethi

Department of Humanities and Social

Sciences, National Institute of Technology

(NIT), Rourkela, Odisha, India

Correspondence

Malayaranjan Sahoo, Department of

Humanities and Social Sciences, National

Institute of Technology (NIT), Rourkela,

Odisha, India.

Email: sahoomalayaranjan4@gmail.com

Abstract

This article examines the relationship between energy consumption, industrialization,

urbanization, economic growth, and financial development in India from 1980 to

2017. The ARDL bound testing; Johansen & Juselius cointegration approach and

Gregory & Hansen structural break cointegration technique confirm the long-run

relationship exists among variables. The result of long-run analysis indicates that the

industrialization, urbanization and economic growth play a vital role in increasing

energy consumption in India. However, financial development indicates negative

relation to energy consumption. The coefficient of error correction term is negative

and statistically significant at 1% confidence level, it means last-period's deviation

from a long-run equilibrium. It is clear from the results of Toda-Yamamoto Causality,

there is a unidirectional causality running from industrialization to energy consump-

tion. However, there is bidirectional causality showing between energy consumption

and urbanization, economic growth and energy consumption, and urbanization and

Economic growth. Urbanization facilitates fuel switching, as decentralized rural

energy sources like traditional wood-burning are replaced by centralized energy

sources. From the above findings, we argue that proper awareness should be made

at the urban center regarding use of energy saving equipments and public infrastruc-

ture should be improved to harness the effect of urban agglomeration. As rapid

development of energy intensive-industries and economic activity in Indian economy,

there is need of energy efficient technology in industry in order to reduce energy

consumption.

JEL CLASSIFICATION

K32; C22; F44

1|INTRODUCTION

India is one of the emerging countries in the world, the second-largest

country in terms of population and third-largest energy consumer

after China and United States. According to International Energy

Agency (IEA, 2015) India's share on total primary energy consumption

has increased from 3.0% in 1970 to 5.7% in 2013 and energy import

to total primary energy consumption also increased from 9.8 to 31.7%

during 1973 to 2013. So it clearly shows that there is mismatch

between energy demand and supply in the economy. Urbanization

and industrialization are one of the common features of economic

development. With the steady growth of the economy, the process of

urbanization depends on the shift of surplus population from rural to

urban areas along-with the growth of some industrialized urban cen-

ters. Urbanization is taking place at a faster rate in India. According to

1901 census, population residing in urban areas in India was 11.4%

Received: 16 August 2019 Revised: 6 January 2020 Accepted: 28 January 2020

DOI: 10.1002/pa.2089

J Public Affairs. 2020;20:e2089. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of10

https://doi.org/10.1002/pa.2089