Macroeconomic Drivers and Policy Trade-offs in India’s Renewable Energy Transition: A Time-series Evidence

Abstract

Developing economies like India face a significant challenge in balancing economic growth with energy sustainability. This study empirically analyses the policy trade-offs between urbanisation, economic development, foreign direct investment (FDI), and the adoption of renewable energy (RE) in India. It addresses the complex “development-environment dilemma”, where urbanisation and economic growth drive energy demand, necessitating a shift from fossil fuels to unconventional energy sources to ensure a sustainable ecosystem. Employing a quantitative approach, this paper utilises time-series data for India spanning 1996 to 2024. The study investigates the relationship between renewable energy generation (RE) as the dependent variable and Gross Domestic Product (GDP), Foreign Direct Investment (FDI), and urbanisation as independent variables. The empirical analysis involves testing for stationarity using the Phillips-Perron test, checking for cointegration, and estimating the long-run coefficients using Dynamic Ordinary Least Squares (DOLS) and Fully Modified Ordinary Least Squares (FMOLS) models. Pairwise Granger-causality tests are also conducted to determine the direction of causality. The empirical results reveal a complex dynamic. Both DOLS and FMOLS estimations consistently show that GDP has a significant positive impact on renewable energy consumption, suggesting economic growth enhances the capacity to invest in sustainable energy. Conversely, urbanisation exhibits a significant negative effect on RE adoption. The impact of FDI on RE is found to be statistically weak. Granger causality tests confirm unidirectional causality running from both GDP and urbanisation to RE. Interestingly, while FDI does not appear to cause RE, the results show that RE does Granger-cause FDI, implying that a growing renewable sector attracts foreign investment. The study concludes that India faces a critical policy trade-off. While economic growth stimulates renewable energy adoption, rapid, unplanned urbanisation currently dampens this transition. The findings underscore that an integrated policy framework is urgently needed to reconcile the growth-urbanisation-sustainability nexus, recommending sustainable urban planning and green infrastructure investments to achieve India’s net-zero targets.