Energy Efficiency of Indian Manufacturing Industries: Evidence from Unit-level Analysis

Abstract

Like the dosage of glucose in blood cells, the energy intake of an industry must fall under an optimal limit; otherwise, it might harm the entire system. Often overseeing such idealism and driven by rapid industrialization, technological progress, and rising urbanization, emerging countries like India strive for ever-increasing energy demand to prove their stance on global production and meet their large consumer base. Such massive energy consumption exerts excessive strain on the availability of energy supplies and poses significant economic and environmental challenges. India ranks third in the world’s energy consumption and CO2 emission globally. Within India, manufacturing industries are the principal end-users, accounting for more than half of industrial energy and contributing as the highest carbon dioxide-emitting sector. Therefore, Indian production units must be energy efficient. Considering the industrial growth, energy consumption nexus, and trade-off, energy efficiency is the most effective reform. However, India has not yet achieved its energy efficiency capacity and lagged far behind. Several earlier empirical exercises adopted a piecemeal approach and, at best, contributed to increasing ambiguity in analyzing energy efficiency. Hardly any comprehensive effort exists that can combine a scientific measurement process of energy efficiency, exploration of its determinants, impacts, and spillover effects considering the latest parsimonious unit-level database. Therefore, in this present research, our objectives are fourfold. First, this study computes the energy efficiency scores of Indian manufacturing plants controlling their desirable and undesirable outputs. Second, the research investigates the role of different plant and industry-specific factors that determine the energy efficiency scores of Indian manufacturing industries. Third, the study examines the impact of energy efficiency on plants’ performance. Fourth, it investigates the spillover channels and their mediating effects on the plants. The present study is based on secondary data. The sources include unit-level panel data from the Annual Survey of Industries, firm-level data from the Centre for Monitoring the Indian Economy ProwessIQ, and the Input-Output Transaction Table (2015-16) of the Centre for Social and Economic Progress. The study covers twenty-one categories of two-digit classification types as mentioned in National Industries Classification-2008. However, the analysis is further divided into two sets of high and low-energy intensity groups, and finally, at the individual industry level. A total of 2251 plants from 21 manufacturing industries from 2001 to 2018 are considered, covering 40518 observations. However, data merging has further reduced the sample in spillover effect analysis. The study applies three variants of Data Envelopment Analysis: Directional Distance Function, Slack-Based Measure, and the Non-Separable Hybrid Model to compute the energy efficiency scores. This research applies the Global Malmquist Productivity Index to compute the manufacturing plants’ productivity level. The study uses fractional regression models to identify the determinants. The study further involves POLS, fixed and random effect, 3SLS, and SUR to investigate the impact of energy efficiency on manufacturing plant performance. The findings reveal that the Indian manufacturing industries have significant potential to improve their overall efficiency. The group-wise result highlights that the high energy-intensive group is less efficient than the aggregate manufacturing and low energy-intensive group. However, the result demonstrated that few industries have higher efficiency scores even after high energy consumption. The study further demonstrates that the plant-specific variables such as the size of labor, skilled labor, privately owned plants, urban located plants, resource allocation, technological progress, information and communication technology, higher capital intensity, import intensity, and the adaptation of ISO-certification have promoted energy efficiency. In contrast, size, age, and capital intensity have adversely affected the energy efficiency level in the Indian manufacturing sector. In addition, the result reveals that the industrial concentration has promoted energy efficiency, but the structure has negatively affected the energy efficiency. The study has mixed evidence in individual and group categories. The study also discovers that the effect of energy efficiency on gross value added and profit is positive, unlike the total factor productivity. Additionally, the study finds positive spillover effects both horizontally and vertically. Based on the empirical findings, the study provides comprehensive policy suggestions for the sustainable development of Indian manufacturing industries. At the end of the analysis, the study identifies its limitations and provides scope for future research.