Determinants of Energy Intensity in Indian Manufacturing Industries: A Firm Level Analysis

Abstract

The demand for energy, particularly for commercial energy, has been growing rapidly with the growth of the economy, changes in the demographic structure, rising urbanization, socio-economic development, and the desire for attaining and sustaining self-reliance in some sectors of the economy. In this context the energy intensity is one of the key factors, which affect the projections of future energy demand for any economy. Energy intensity in Indian industry is among the highest in the world. According to the GoI statistics, the manufacturing sector is the largest consumer of commercial energy in India. Energy consumption per unit of production in the manufacturing of steel, aluminum, cement, paper, textile, etc. is much higher in India, even in comparison with some developing countries. In this study we attempt to analyze energy intensity at firm level and define energy intensity as the ratio of energy consumption to sales turnover. The purpose of this study is to understand the factors that determine industrial energy intensity in Indian manufacturing. The results of the econometric analysis, based on firm level data drawn from the PROWESS data base of the Centre for Monitoring Indian Economy during recent years, identify the sources of variation in energy intensity. Also, we found a non-linear ‘U’ shaped relationship between energy intensity and firm size, implying that both very large and very small firms tend to be more energy intensive. The analysis also highlights that ownership type is an important determinant of energy intensity. We found that foreign owned firms exhibit a higher level of technical efficiency and therefore are less energy intensive. The technology import activities are important contributors to the decline in firm- level energy intensity. The paper also identifies that there is a sizable difference between energy intensive firm and less energy intensive firms. In addition the results shows that younger firms are more energy efficient as compared to the older firms and an inverse U’ shaped relationship is found between the energy intensity and the age of the firm.Energy Intensity, Commercial Energy Consumption, Indian Manufacturing Industries