An Empirical Investigation of the Causal Relationship amongst Energy Consumption, Net Fixed Capital Stock and Economic Growth in India

Purpose- in this paper, an effort has been made to establish the causal relationship amongst energy consumption, net fixed capital stocks and economic growth measured in terms of Gross Domestic Product (GDP) in India. Further attempt has been made to fix the direction of causality by taking into account the disaggregated energy consumption such as petroleum, coal, electricity and gas consumption. Design/ methodology/ approach- the methodology is based on the Engle-Granger method of co-integration and Johanson-Juselius multivariate method and uses a time series data of disaggregated energy consumption, net fixed capital stocks and GDP over the period 1970-2002. Since no co-integration was found amongst the concerned variables, Standard Granger method is used to find out the causality between energy consumption and economic growth as well as energy consumption and net fixed capital stocks. Findings- the empirical results infer that there is bi-directional causality between energy consumption and economic growth and unidirectional causality running from energy consumption to net fixed capital stocks. The research concluded that since India is a net energy importer, especially petroleum, it has to pay a high oil import bill every year. Therefore, using oil more efficiently and/or substituting petroleum and gas by coal and electricity wherever possible could be a good policy measure. Perhaps, an energy conservation policy regarding petroleum and natural gas consumption would not lead to any adverse side effects on economic growth in India.