Understanding technological progress and input price as drivers of energy demand in manufacturing industries in India

• Energy use behaviour of manufacturing industries in India during 1973/74 to 2011/12.
• Technological progress induced output growth and gain in energy productivity.
• Energy saving bias of technological progress is prevalent in recent years.
• Own price elasticity of energy demand is negative.
• Increase in energy price has induced technological progress.

This paper presents a comprehensive analysis of energy demand behaviour of seven energy intensive manufacturing industries and the aggregate manufacturing sector in India during 1973–74 to 2011–12. The policy Perform, Achieve and Trade (PAT) has mandated energy efficiency targets for these manufacturing industries in India. We focus on two major drivers of energy demand: technological progress and energy price. Productivity growth accounting and estimation of parametric cost function using Annual Survey of Industry data bring out important implications regarding the role of these two drivers. Results suggest that these industries experienced technological progress over the study period (1973–74 to 2011–12) with significant energy-saving bias during 1998–99 to 2011–12. Increase in energy price has led to reduction in energy demand and augmented technological progress in most of the industries. Energy and material inputs are mostly substitutes. During 1998–99 to 2011–12, productivity growth of energy input was induced by both technological progress and increase in energy price. Estimates of inter-factor substitution suggest that price induced reduction in energy demand can be a capital-intensive process in case of some industries. Rebound effect has never taken back full gains of energy efficiency policies in the context of these industries.