Investigating the moderating role of financial development in environmental degradation in India

• Published date: 01 December 2022
• Author: Suman Dahiya
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2765

RESEARCH ARTICLE

Investigating the moderating role of financial development in

environmental degradation in India

Suman Dahiya

Department of Commerce, Central University

of Haryana, Mahendergarh, Haryana, India

Correspondence

Suman Dahiya, Department of Commerce,

Central University of Haryana, Mahendergarh,

Haryana, India.

Email: suman@cuh.ac.in,dahiyasuman06@

gmail.com

Abstract

The present study investigates the moderating role of financial development in envi-

ronmental degradation in India. This study uses time-series data for a period of

46 years from 1971 to 2016 and employs an autoregressive distributed lag (ARDL)

bound testing approach with two models (direct effect and moderating effect). The

study reveals that economic growth and non-renewable energy consumption are the

main factors that worsen environmental quality in India while the impact of financial

development on carbon emissions is negatively significant. Further, the findings of

this study confirm the significant moderating effect of financial development on the

impact of economic growth on carbon emissions. This study suggests that financial

development can be used as a policy variable to decrease the environmental cost

without hurting the economic growth in India.

KEYWORDS

CO

2

emissions, economic growth, energy, financial development, India, moderating role

1|INTRODUCTION

In the pursuit of rapid economic growth, countries across the world

led by the industrial revolution ignored the increased amount of

greenhouse gas emissions (GHG), particularly carbon emissions that

have deteriorated environmental quality. After the industrialization

era, the use of natural resources such as fossil fuel for the

manufacturing of goods has increased GHG emissions substantially

particularly during the last four decades (Zakaria & Bibi, 2019). The

concentration of GHG emissions in the environment causes an

increase in the temperature (i.e., 1.02C rise over 1900–2015) across

the globe that poses a great challenge of global warming before the

world (Saud et al., 2019) and CO

2

emission is the biggest source of

global warming as it accounts 75% of the GHG emissions (Abbasi &

Riaz, 2016). Costs of global warming and climate change are seen in

the increased incidence of severe adverse weather conditions like

floods, storms, varying rainfall patterns, and rise in the sea level

(Dar & Asif, 2018). To make the environment sustainable,

policymakers and regulatory bodies around the world are taking vari-

ous initiatives such as Kyoto Protocol and Paris agreement that have

already been placed (Sharma et al., 2020). However, at the same time,

it is reported that the Asia-pacific region is not putting very serious

efforts toward the achievement of sustainability and, thus more diffi-

cult to achieve any of 17 sustainable development goals (SDGs) by

2030.

1

As an economy starts growing, it impacts the environment nega-

tively, and subsequently, the environment deteriorates at an increas-

ing rate with the rapid growth of the economy. However, once the

income reaches a higher level than deterioration of the environment

starts declining. This notion in the literature is termed the environ-

mental Kuznets curve (EKC) (Sinha & Bhattacharya, 2016). Grossman

and Krueger (1991) state that three things namely scale effect, com-

position effect, and technique effect makes possible the inverted

U-shaped association between environmental degradation and eco-

nomic development. Initially, the scale effect causes the fallin the envi-

ronmental quality when the industrial sector dominates the economy

but over time economic structure shifts toward the service and light

manufacturing sector then composition effect decreases the pollution,

and finally, the technique effect replaces the old and carbon-intensive

techniques with the clean technology (Stern, 2004). Developing

1

Asia and the Pacific SDG Progress report 2020, UNESCAPs

Received: 3 April 2021 Revised: 12 August 2021 Accepted: 20 September 2021

DOI: 10.1002/pa.2765

J Public Affairs. 2022;22(Suppl. 1):e2765. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of11

https://doi.org/10.1002/pa.2765