Analysis of the Sustainability of India's Current Account Deficit

Many economies, along their path towards development import more than they export which leads to an increase in Current Account Deficit (CAD). With respect to India, most of the times our current account has remained in deficit which, reflects its developing nature. So, it becomes a more pressing co...

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Bibliographic Details
Published in:Journal of international economics (Hyderabad, India) India), 2020-07, Vol.11 (2), p.2-18
Main Authors: Ramakrishnan, R, Raju, G Raghavender, Gopakumar, K U
Format: Article
Language:English
Subjects:
Borrowing
Capital markets
Current accounts
Economic growth
Exports
External debt
GDP
Gross Domestic Product
Imports
International finance
Macroeconomics
Securities markets
Side effects
Solvency
Sustainability
Trends
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Summary:Many economies, along their path towards development import more than they export which leads to an increase in Current Account Deficit (CAD). With respect to India, most of the times our current account has remained in deficit which, reflects its developing nature. So, it becomes a more pressing concern for India to find that level of CAD that helps to fund its developments and boost economic growth and at the same time does not pose a threat to the economy. That level of CAD beyond which it has an adverse effect on the economic growth is referred as the threshold level of CAD. This study deals with the issues relating to sustainability of India's CAD for the period 1971-2018. The results conclude that the threshold levels of CAD were 2.1% and 3.4% of GDP, for the pre and post reform periods respectively. After arriving at the threshold level, we determine the probability of crisis due to CAD, using the probit regression for the period 1971-2018. The threshold level of CAD is fixed at 2% for this study as it is the threshold level widely accepted in the academia. The variables chosen for the study include Net External Liabilities to GDP ratio (NELY), Short term liabilities to external liabilities ratio (STLEL) and Import cover (IC). All the variables turned out to be significant and the relationships concur well with the theory. In order to assess the sustainability of CAD, cointegration between exports and imports is carried out using EngleGranger methodology. Results confirm the existence of cointegration between exports and imports in the long run.
ISSN:0976-0792