On the role of the trend and cyclical components in electricity consumption and India's economic growth: a cointegration and cofeature approach

• Author: Wasim Ahmad,Bandi Kamaiah,Md Zulquar Nain
• Date: 01 March 2014
• DOI: http://doi.org/10.1111/opec.12028
• Published date: 01 March 2014

On the role of the trend and cyclical

components in electricity consumption

and India’s economic growth:

a cointegration and cofeature approach

Wasim Ahmad,*,** Md Zulquar Nain*** and Bandi Kamaiah****

*Assistant Professor, Department of Finance, College of Business Administration (CBA), Salman bin

Abdulaziz University, Al-Kharj-11942, Kingdom of Saudi Arabia (KSA). Email: ahmadwasimdu@gmail.com

**Assistant Professor, Department of Financial Studies, University of Delhi, New Delhi, India

***PhD Candidate, School of Economics, University of Hyderabad, Hyderabad, India

****Professor, School of Economics, University of Hyderabad, Hyderabad, India

Abstract

In this paper,the relationship between electricity consumption (LEC) and economic growth (LGDP)

using Autoregressive Distributed Lag (ARDL) model and Granger causality within error correction

frameworkin India over the period 1970–1971 to 2009–2010 are analysed. The results of these tests

exhibit the existence of long-run equilibrium relationship and bilateral causality in case of India.

Then, Hodrick–Prescott filter is used to decompose the data into trend and cyclical (fluctuation)

components of electricity consumption and economic growth. The results of decomposed series

revealed that both series are cointegrated with the strong evidence of bidirectional causality, imply-

ing that trend and cyclical components are strongly correlated with business cycles in India. From

these findings, we conclude that the feedback hypothesis is applicable in case of India.Therefore,

government should undertake necessary policy measures to augment the investmentin power sector

from existing level and more importantly the emphasis should also be given on the efficient use

of electricity.

1. Introduction

The examination of the relationship betweenenergy consumption and economic growth in

energy economics has been, and continues to be, an important area of research for acad-

emicians, practitioners and regulators alike for a variety of reasons. Firstly, the issue is

inextricably linked to few central notions of energy economics, notably energy depend-

ence and efficient use of energy resources. Secondly, it provides an important direction in

undertaking appropriate policy measures in order to sustain the pace of economic growth

and employment in the economy. Among all energy resources, electricity is considered

being one of the primary sources of energy as the growth stories of many leading

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economies still rely on its availability. Particularly in the context of emerging economies,

the issue of electricity consumption remains very relevant as these economies exhibit

strong linkages between electricity consumption and economic growth (see Payne,2010a;

Ozturk and Acaravci, 2011). More specifically, in an emerging economy likeIndia, which

is heavily dependent on different uses of electricity, plays significant role in driving the

economy. In recent years, there have been many instances where the economy has been

adversely impacted by electricity shortages exacerbated by the huge demand and supply

mismatch, resulting in heavy loss of income and employment (Economic Survey,

2010–11). Researchers and regulators consider several factors responsiblefor such a huge

demand–supply bottlenecks like high growth rate of population, rapid urbanisation and

surge in the industrial activities that haveled to enormous increase in electricity consump-

tion in India (Ghosh, 2002, 2009). Given the importance of the above-mentionedissues, it

is important that one should re-examine the role of electricity consumption on economic

growth of the country in the light of recent demand and supply scenarios.Taking the above

discussion as a starting point, this paper attempts to examine the relationship between

energy consumption and economic growth under a new dimension byexhibiting the roles

of trend and cyclical components. This is entirelya new attempt as far as energy literature

on Indian economy is concerned. So far relevant literature on India has mainlyfocused on

the exhibition of the direct relationship without taking into consideration the special role

played by the exogenous factors (cyclical trend) in determining the consumption of

energy. This is particularly relevant as it will further provide important direction to

policymakers and relevant experts in analysingthe electricity consumption by taking into

account not only the existing resources but also the factors that are assimilated with busi-

ness cycles and other macroeconomic variables (Thoma, 2004; Yuan et al., 2007; Akinlo,

2009).

In literature, several empirical studies have examinedthe causal relationship between

energy consumption and economic growth, covering different set of countries, time-

periods and have used different proxy variables. Over the years, due to its strong macro-

economic implications, it has also become a fertile research terrain for academicians and

regulators. Until now, the empirical findings from these studies have been varied and

sometimes conflicting especially with regard to the direction of causal relationship. The

studies of Squalli (2007), Chen et al. (2007) and Apergis and Payne (2011) categorise the

direction of causal relationship into four different types each of which has important

implications for electricity policy. Firstly, the unidirectional causality running from elec-

tricity consumption to economic growth implies that restrictions on the use of electricity

may adversely affecteconomic g rowth,whereas increases in electricity may contribute to

economic growth (Shiu and Lam, 2004; Altinayand Karagol, 2005; Lee and Chang, 2005;

Narayan and Singh, 2007; Akinlo, 2009; Odhiambo, 2009). Secondly, the unidirectional

causality running from economic growth to electricity consumption would suggest that

Wasim Ahmad, Md Zulquar Nain and Bandi Kamaiah108

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