Assessing the impact of output growth, renewable energy consumption and financial development on environmental quality: empirical evidence from India
Authors: Khah Arif Mohd , Ahmad Masroor 
Published: February 2025

Purpose

This study aims to assess the nexus among output growth, renewable energy consumption, financial development and environmental quality (EQ) in the presence of non-renewable energy consumption for India using annual time series data for the period 1980–2021.

Design/methodology/approach

To conduct an econometric analysis, this study uses the augmented autoregressive distributed lag (AARDL) model, which offers the benefit of simultaneously estimating both long-run and short-run estimators. Furthermore, this study uses the Toda-Yamamoto (1995) test and the Breitung and Candelon (2006) test to explore causal relationships in both time and frequency domains (FDs), aiming to understand the dynamic associations between variables.

Findings

Using the AARDL model, the authors found that initially, with an increase in output growth, EQ deteriorates, but once output growth reaches a threshold level, EQ improves. Likewise, this study found that financial development enhances EQ. Furthermore, the authors found a unidirectional causality from the load capacity factor (LCF) to output growth, renewable energy consumption and non-renewable energy consumption in the case of time domain analysis, and no feedback causality was documented. In the FD causality approach, this study reveals a causality nexus from LCF to output growth, financial development and renewable energy consumption at low, middle and high frequencies.

Practical implications

The findings highlight the need for targeted policies to balance economic growth and environmental sustainability in India. Policymakers should promote green technologies and enhance renewable energy use to mitigate the initial negative impact of output growth on EQ. The positive role of financial development suggests that encouraging green financing and sustainable investments can further improve environmental outcomes. The Indian economy needs to prioritise sustainable growth in its financial sector by aligning it with ongoing transformative processes for sustainable development. To achieve the sustainable development goals pertaining to EQ, the Indian economy must diminish its reliance on fossil fuels. In addition, the government of India must provide financial assistance to environmental organisations to foster the LCF.

Originality/value

To the best of the authors’ knowledge, this is the first study to investigate the dynamic nexus among financial development, output growth, renewable energy consumption and EQ proxied by LCF within the Indian context in the presence of non-renewable energy consumption. Likewise, this study uses the LCF to assess environmental sustainability in India, offering a comprehensive evaluation by integrating both supply and demand dimensions. From a policy perspective, this study highlights the significance of fostering sustainable economic growth, implementing environmentally conscious banking policies, and adopting diversified and ecologically friendly strategies. These policy directions are essential for conserving ecological resources and fostering a more sustainable and resilient development trajectory for India.