Effects of foreign direct investment, economic integration, industrialization and economic growth on energy intensity: case of India

Abstract

India is a developing market economy that comprised over 18% of the global population in 2020 and showed a 1.29% share of world GDP (Gross Domestic Product) in 1990. In addition, 3.20% of global energy consumption belonged to India in 1990. By 2020, India's share of the world GDP was 3.08%, increasing its GDP by almost 3 times. However, energy usage increased by less than 2 times with a share of 6.25% in the world's total energy consumption. Therefore, India managed to decrease its energy intensity per capita level by 64.35% in 2020 compared to 1990 by using less energy even with an increased income. In this context, this study investigated the question of how the Indian economy reduced its energy intensity for the period between 1990 and 2020. The impacts of GDP per capita, economic integration, foreign direct investments (FDI) and industrialization on energy intensity were analyzed using annual data from 1990 to 2020. First, the standard Augmented Dickey-Fuller Test (ADF) and Fourier ADF test methods were used to determine stationarity of the series. Then Fourier Autoregressive Distributed Lag (ADL) and Fourier Engle-Granger tests, recently introduced in the literature, were used to examine the cointegration relationships because all of the series were stable after subtracting the first differences. The results indicated a cointegration link between the variables. According to the empirical evidence obtained from FMOLS/CCR (DOLS) analysis, an increase of 1% in economic growth and foreign direct investment over the long run led to a decrease in energy intensity of approximately 1.08%/1.12% (1.14%) and 0.01%/0.001% (0.05%), respectively. Additionally, the results from FMOLS/CCR (DOLS) analysis indicated that a 1% rise in industrialization and trade openness in the long term resulted in an increase in energy intensity of approximately 0.25%/0.13% (0.39%) and 0.15%/0.18% (0.21%), respectively. Finally, fully modified ordinary least squares (FMOLS), Charnes, Cooper and Rhodes Model (CCR), and Stock-Watson Dynamic Ordinary Least Squares (DOLS) estimators were used for short and long-term coefficient estimations. Therefore, we conclude based on these findings that economic growth and foreign capital decrease energy intensity over the long term, while industrialization and economic integration increase energy intensity.