Effects of Energy Price Rise on Investment: Firm Level Evidence from Indian Manufacturing Sector

Abstract

This paper analyses the effects of the rising prices of energy products on the investment of a large panel of manufacturing firms in India during 1993- 2013. The prime motivation behind this study is the absence of an empirical study into this research issue exclusively on Indian economy. The empirical results obtained by estimating an Error Correction Model (ECM) using Generalized Method of Moments (GMM) show that energy price rise has negative effect on the investment of firms in the manufacturing sector. The negative effect is transmitted to the firm’s investment through both demand-side and supply-side factors. The transmission also depends upon factors such as the energy intensity of production. The results also show that the sales-growth-investment relationship becomes weak in the face of the rising prices of the energy which could be due to the cautious approach to investment adopted by the firms, as suggested by theories of irreversible investment. Therefore, it calls for the attention of the policy makers to evolve a comprehensive energy-policy to ensure continuous supply of energy at affordable prices to the manufacturers.