Causality between Energy Consumption and Output Growth in Indian Cement Industry: An Application of Panel Vector Error Correction Model

The aim of this paper is to examine the existence and direction of the causal relationship between energy consumption and output growth for Indian cement industry for the period 1979-80 to 2004-05. The most recently developed panel unit root, heterogeneous panel cointegration and panel-based error correction models have been applied in a multivariate framework including capital stock, labor, and material other than energy and output. The empirical results confirm a positive long-run cointegrated relationship between output and energy consumption when heterogeneous state effect is taken into account. It is also found that there exists a long run bi-directional relationship between energy consumption and output growth in Indian cement industry for the study period, implying that an increase in energy consumption directly affects growth of this sector and that growth also stimulates further energy consumption. These empirical findings imply that energy consumption and output are jointly determined and affect each other. Also, energy conservation policies should be associated with consistent encouragement and support from the government for adoption of energy efficient technologies in order to avoid negative impacts of theses policies on the growth of this industry.