Energy consumption, financial development and economic growth in India: New evidence from a nonlinear and asymmetric analysis

Abstract

This paper investigates the asymmetric relationship between energy consumption and economic growth by incorporating financial development, capital and labour into a production function covering the Indian economy from 1960Q 1 -2015Q 4 . The nonlinear autoregressive distributed lag bounds testing approach is applied to examine the asymmetric cointegration between the variables. An asymmetric causality test is also employed to examine the causal association between the considered variables. The results indicate cointegration between the variables in the presence of asymmetries. The asymmetric causality results show that only negative shocks in energy consumption have impacts on economic growth. In the same vein, only negative shocks in financial development have impacts on economic growth. By contrast, symmetrically, capital formation causes economic growth. Finally, over the study period, a neutral effect exists between the labour force and economic growth in India. The implications of these results for growth policies in India are also discussed.Keywords: Financial Development, Energy, Growth, India, Asymmetries JEL classification: O13 Acknowledgements: We would like to thank the editor, Professor Richard Tol (University of Sussex, Brighton, UK), as well as the three anonymous reviewers, for their valuable comments and suggestions that helped us improve our paper significantly. We also thank the participants at the 7 th International Research Meeting in Business and Management (IPAG, Nice, France, 11-12 July 2016). We are also grateful to Jawad Kazmi for his technical assistance. The authors' are responsible for any remaining errors or shortcomings. IntroductionThis study uses quarterly data to investigate the relationship between energy consumption and economic growth in India over the 1960-2015 period. Financial development (measured by domestic credit to the private sector), 1 capital formation and labour force 2 are also included in the Cobb-Douglas production function. This study's main contribution to the existing literature on the energy-growth nexus concerns its examination of the potential asymmetric relationship between the variables. Taking this asymmetry into account is important because a positive or negative variation on one variable does not have the same impact on the other variable. The existence of an asymmetric relationship between two variables can be caused by numerous factors, one of which concerns the complexity of economic systems and the mechanisms that generate the variables under study. This complexity may induce various channels through which one variable affects another. In our case, the relationship between energy consumption and economic growth has been found to be very complex because previous studies have shown four possible impact channels: the growth, conservative, feedback and neutrality hypotheses. 3 On the one hand, the relationship between energy consumption and financial development can also be very complex because numerous impact channels can exist between them...

Production function with electricity consumption and policy implications in Portugal

“…This confirms that capital is positively linked with economic growth. This result is similar to that of Sahoo and Dash (2009) and Shahbaz et al (2017) for the case of the Indian economy. This causal direction can be explained by the fact that policymakers in emerging and upper-middleincome countries ensure that public and private investments are achieved to sustain long-term economic growth and employment.…”

“…Hence, we prefer the quadratic match-sum method because it transforms the annual data into quarterly data following Denton (1971). methodology, adopted by Shahbaz et al (2017) to transform annual into quarterly data to avoid the common-method variance due to the use of different data transformation methods. capital displays significant excess kurtosis, indicating that it has a fatter distribution than a normal distribution.…”

“…We have transformed the annual data to into a quarter-based frequency by applying the quadratic match-sum method following Shahbaz et al (2017). 5 To the best of our knowledge the variable financial development which we proxied by domestic credit to the private sector is available only at the annual frequency as it is computed as a weighted average of balance sheet data such as loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment.…”

“…The ambiguity in the empirical results may be due to the ignorance of asymmetry or non-linearity arising in time series due to structural reforms; regimes shifts; financial, economic and energy reforms; and regional and global imbalances. This presence of asymmetry in time series may change the impact of electricity consumption on economic growth and the direction of causality between both variables (Shahbaz et al 2017). Few studies in the existing energy economic literature employed the production function in the case of Portugal (Tang et al 2011, Tang and Tan 2012and, Marques and Fuinhas 2015.…”

“…Financial development may contribute to economic growth directly and indirectly via capitalization (Shahbaz et al 2017). Financial development affects electricity consumption via consumer, wealth and business effects (Sardosky 2010, Shahbaz andLean 2012 Brock et al (1996) is applied to test whether non-linearity is present in the series.…”