Electricity Consumption and Economic Growth at the State-level in India: Evidence using Heterogeneous Panel Data Methods

As the Indian economy is one of the fastest growing economies in the world, the demand for energy is very high. In this context, it is crucial to understand the long run relationship between energy consumption and economic growth in the Indian economy. This study is an attempt to examine the existence and direction of causal relationship between electricity consumption and economic growth among seventeen major states of India during the period 1960-61 to 2014-15 both at the aggregate and sectoral level. The study employs the panel cointegration tests of Pedroni (2004) and Westerlund & Edgerton (2008) with the level break/shift to the data set. The results provide evidence of a long run equilibrium relationship between economic growth and electricity consumption. For the overall state economy, the empirical results have established the existence of bidirectional causality running from electricity consumption to state income (economic) growth. At the sectoral level, there is evidence of unidirectional causal relationship between electricity consumption and growth in both the agriculture and domestic sectors. However, in case of industrial sector, a unidirectional causal relation from electricity consumption to industrial growth was witnessed.