Electric power consumption, foreign direct investment and economic growth: A comparative study of India and Pakistan

The purpose of this paper is to find potential causality and comparative relationships between electric power consumption, foreign direct investment and economic growth for India and Pakistan.

Granger causality tests have been employed for estimating the short and long run relationships between the variables, along with the adoption of co‐integration and error correction mechanism.

Empirical evidence for India covering a period of 1975‐2008 indicates long run causalities for electric power consumption and foreign direct investment boosting economic growth, electric power consumption and economic growth impacting foreign direct investment. For Pakistan, causality was established for foreign direct investment and economic growth inducing electric power consumption in the long run.

For India, there is a strong need of policy that would guarantee secure and continued supply of electricity, as enhanced electric consumption is expected to boost foreign direct investment and economic growth. Pakistan should aim for cost‐effective, stable and environment friendly alternate to fossil fuels as the main source of its electric power generation.

Literature on the electricity consumption‐FDI‐economic growth nexus is scarce. The present study adds to this strand of literature. Also for the first time, in this scenario, this paper uses two economies (India and Pakistan), provides a comparative analysis of the empirical results and presents prospective explanations for the observed causality differences between the two economies.