The relationship between electricity consumption, trade openness and economic growth in India

• Date: 01 December 2018
• Published date: 01 December 2018
• DOI: http://doi.org/10.1111/opec.12134
• Author: Ramphul Ohlan

The relationship between electricity

consumption, trade openness and economic

growth in India

Ramphul Ohlan

Institute of Management Studies and Research, Maharshi Dayanand University, Rohtak124001, Haryana,

India. Email: ramphul.ramphul@gmail.com

Abstract

The present study explores the empirical relationship between electricity consumption, trade

openness and economic growth in India utilising cointegration tests and Granger causality vector

error correction model for the period 1971–2016. The results of ARDL model reveal that the

variables are cointegrated. The robustness of the long-run relationship between variables is

confirmed by applying Hatemi-J cointegration model. The empirical results show that electricity

consumption statistically significantly stimulates economic growth in India both in long term and

short term. However, the elasticity of economic growth with respect to electricity use is found to be

higher in the long term than that of the short term. Furthermore, we find the existence of a long-

term Granger causality flowing from electricity use to economic growth. In addition, the electricity

consumption is also commanded by economic growth in the short-run. As a broad policy

implication, India needs to focus on the development of a sustainable mode of electricity

production for achieving high economic growth in the years to come.

1. Introduction

Electricity consumption, trade openness and economic activity have tended to move

together across the globe. For instance, the world electricity consumption per capita has

registered a robust compound annual growth rate of 1.94% during the decade of 2004–

2014. Besides, the growth in electricity consumption per capita is significantly higher

than that of overall energy consumption, which grew at a compound annual rate of

0.95% during this period. It implies the rising importance of electricity in the end-use

energy mix. Indeed, electricity is the most versatile and broadly utilised form of energy.

The electricity consumption is a widely used indicator of the socioeconomic

development and well-being of a country (Best and Burke, 2018; Faisal et al., 2018).

More importantly, the growth in electricity consumption is mainly driven by developing

countries. For example, electricity consumption per capita in India has witnessed a

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compound annual growth rate of 5.93% and the country has also experienced the fastest

economic growth during the same period.

Similarly, trade openness at the global level, measured as a share of foreign trade in

gross domestic product (GDP), has jumped up remarkably from 54.39% in 2004 to

60.7% in 2014. According to Kyophilavong et al. (2015), foreign trade stimulates

economic activities which require more energy. In emerging economies, trade openness

advances the stages of economic development in which growth in the industrial sector

surpassed that of agriculture. This change in composition of GDP also results in more

energy demand. On the contrary, trade openness enables the import of advance

technologies which can lead to low-energy intensity of GDP. Besides, en ergy is an

important input for production and transportation of traded goods. So, energy affects

trade openness as well. Against this theoretical underpinning, the investigation of the

existence and direction of a causal relationship among electricity use, trade openness and

economic activity in emerging economies has important implications to devise

successful electricity policies.

If, for example, economic growth causes electricity consumption (conservative

hypothesis) or there is lack of causality between electricity use and economic activity

(neutrality hypothesis), then electricity use can be reduced without adversely affecting

economic growth. Conversely, if one-way causality runs from electricity use to

economic growth (growth hypothesis) or a two-way relationship (feedback hypothesis)

is present between electricity use and economic growth, then the expansive electricity

production policies will be required. The main objective of the study is to examine the

dynamic causality among electricity use, trade openness and economic activity in India.

The remainder of the study is structured as follows. Section 2 examines the current

status of economic growth, electricity consumption and trade openness in India and

describes the need for the study. Section 3 provides an analytical review of relevant

literature. Section 4 briefly explains the source s of data and methods of analysis used in

the study. The empirical results are presented and discussed in Section 5. The final

section summarises the major findings and provides their policy implications.

2. Electricity consumption, trade openness and economic activity:

India’s case

India is one of the rapidly growing emerging economies. However, India’s economic

growth heavily relies on energy use (Ohlan, 2015, 2016). Specifically, the country ranks

3rd in the world’s total energy consumption with a share of 6.4% in 2015. In fact, the

electric energy plays a central role in India’s end-use energy mix. Figure 1 exhibits the

trends in growth rates of electricity use and GDP in India. It can easily be seen from

Fig. 1 that India’s economic growth maintained a consistent movement with electricity

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332 Ramphul Ohlan