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The Causal Nexus between Oil Consumption and Economic Growth in India

Haroon Rasool, Masudul Hasan Adil, Md. Tarique

Abstract



Oil has been a dominant source of energy especially in developing countries. It is believed that consumption of oil in developing countries, in general and India in particular, has been accelerated by economic growth and development. To this end, this article examines the causal nexus between economic growth and oil consumption in case of India, using autoregressive distributed lag model (ARDL) bounds testing approach. This study is based on annual time series data for the period 1971-2015. The result of bounds test reveals the co-movement of the variables under consideration, in the long run. Both the long-run and short-run coefficients of the ARDL representation hold good which indicates that consumption of oil spurs economic growth in India. The statistically significant error correction term (ECT) further suggests that the long run causality running from oil consumption to economic growth, in case of India. Wald statistics also found evidence of one sided short run causality from oil consumption to growth. Therefore, study supports the growth hypothesis; where the consumption of oil contributes to economic growth significantly. Consequently, it can be concluded that an energy policy, which reduces oil consumption puts a slight constraint on gross domestic product growth i.e., shortage of oil supply can obstruct economic growth.

Keywords


oil consumption, economic growth, cointegration, ARDL, ECM, growth hypothesis, India.

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