ABSTRACT
This chapter tries to find the causality between the variables of electricity consumption (EC) and gross domestic product (GDP) using panel data of five South Asian countries during the period 2000–2011. A panel unit root test and panel co-integration test are used to determine the long-run equilibrium. The fully modified ordinary least square method was applied to estimate the panel electricity elasticity coefficient. Granger causality based on the vector auto regression model was then applied to determine the direction of causality. The finding reveals an electricity elasticity coefficient of 1.31, which implies that a one per cent increase in electricity consumption would lead to an increase in the GDP by 1.31 per cent, indicating a highly responsive electricity demand. This unidirectional causality running from electricity consumption to GDP has important policy implications. Electricity consumption leads economic growth, which has two policy implications –one of which is that reduction of electricity consumption through bringing domestic energy prices in line with market prices would lead to a fall in GDP or employment.
