Relationship between Electricity Energy Consumption and GDP: Evidence from India

Abstract

The paper examines whether electricity energy consumption drives economic growth or vice versa in the Indian context using the annual data covering the period from 1970–1971 to 2011–2012. KPSS tests reveal that both the series, after logarithmic transformation, are non-stationary at level and stationary at first difference. Applying, two step Engle-Granger technique and Granger causality/ Block exogeneity Wald test, the study suggests that it is the electricity energy consumption that fuels economic growth both in short run and long run. It rejects the neo-classical hypothesis and empirically proves that electricity consumption is a limiting factor on economic growth. Using dynamic OLS(DOLS) method, the elasticity of electricity consumption on economic growth is estimated at 0.86 and the elasticity of economic growth on eletrcity consumption is estimated at 1.19. Based upon the elasticity, the energy requirement and energy generation is projected at 1436 BU and 1766 BU at the end of 12th Plan (at end of 2016–2017) period.