Sustainability of India’s Current Account Deficit

The study empirically investigates the long-run sustainability of India’s current account deficit and the factors that have affected its current account balance by applying Husted (1992) intertemporal budget constraint model and Keynesian national account identity, respectively. We utilize a different empirical approach and extend the data set. The Pesaran bounds testing approach and the Johansen and Juselius likelihood ratio cointegration tests results suggest that a long-run positive relationship exists between India’s current account inflows and outflows. It implies that the path of India’s current account deficit is sustainable. We find that there is one cointegrating vector between India’s current account balance, fiscal deficit, real effective exchange rate and interest rate. India’s current account balance is statistically significantly affected by fiscal deficit, real effective exchange rate and interest rate. Our finding suggests that fiscal deficit curtailing policy need to be supplemented by a real effective exchange rate devaluation policy, lowering of interest rate and increase in export promotion measures in order to manage presently mounting India’s current account deficit