On the Causality between FDI, International Trade Indicators, Energy Consumption, and CO2 Emissions in India

1. Introduction

A major greenhouse gas (GHG) emission resulting from combustion of fossil fuels i.e., CO₂ emission, is considered as one of the most important causes for global warming and climatic instability (IPCC, 1996). A debate that has attracted much of the global attention in the past few decades is about reducing GHG emissions from the high polluting emerging economies without limiting the pace of their economic development. Due to the emergence and development of liberalisation, privatisation and globalisation (LPG) of businesses, the economic activities have crossed all the boundaries. Economic activities are taking place on a large scale to achieve extreme economic growth. These days, economic development of a country is the first and foremost aim of every country’s policies for which the governments are encouraging and promoting business activities on a large scale, may it be manufacturing or extraction, especially in developing or less-developed countries, India being one of them. Four basic factors are involved in the process of economic development i.e., human and natural resources and building up of capital and technology (Hitam and Borhan, 2012). The developing countries rely mostly on the foreign capital and technology for their economic development. Over the last two decades, FDI flows have considerably increased all around the world (Seker et al., 2015). Foreign direct investment (FDI) and that too in the manufacturing sector, is considered the only means to attract foreign investments in such countries. The recent step taken by Indian government in this direction i.e., the ‘Make in India’ campaign can be seen as an example of it. In the words of Bokpin (2017), it has almost become a cliché that FDIs, to a very large extent, positively influence the economic prospects of recipient nation. Several relaxations in taxes, environmental standards and regulations are being provided to foreign investors to increase the level of economic activities which, ultimately, are expected to bring economic growth. The global trade (i.e., exports and imports) is also done on a large scale in developing countries to increase the level of gross domestic product (GDP). Markets are thus made open to the global investors through trade liberalisation for the sake of economic growth. Thus, it seems perfectly good for any developing country like India to promote and encourage huge amounts of investments in business activities. At the same time, the effects of these activities on the natural environment of the host country cannot be ruled out because several manufacturing processes make massive use of both renewable and non-renewable energy resources apart from other natural resources. Investors from developed countries exploit the resources of developing countries as these countries have free trade policies and relaxed environmental laws. This becomes clear with the concept of pollution haven hypothesis (PHH) which states that the firms of developed countries relocate to pollution haven countries in order to avoid the costs of complying with high environmental standards prevailing in their home country (Johnson and Turner, 2010). The relationship between the indicators of global trade and the resulting environmental degradation is becoming the most debated and discussed topic among researchers and academicians these days.