Causality between energy consumption and output growth in the Indian cement industry: An application of the panel vector error correction model (VECM)

The aim of this paper is to examine the existence and direction of the causal relationship between energy consumption and output growth in the Indian cement industry for the period 1979-80 to 2004-05. The most recently developed panel unit root, a heterogeneous panel cointegration and panel-based error correction model, is applied within a multivariate framework. The empirical results confirm a positive, long-run cointegrated relationship between output and energy consumption when heterogeneous state effects are taken into account. We also found a long-run, bi-directional relationship between energy consumption and output growth in the Indian cement industry for the study period, implying that an increase in energy consumption directly affects the growth of this sector and that growth stimulates further energy consumption. These empirical findings imply that energy consumption and output are jointly determined and affect each other. The empirical evidence also suggests the implementation of energy conservation policies oriented toward improving energy-use efficiency to avoid any negative impacts of the conservation policies on the growth of this industry.