Intertemporal Sustainability of India's Current Account Balance Under the New Policy Regime

• Published in: Journal of international economics (Hyderabad, India) India), 2024-01, Vol.15 (1), p.43-59
• Main Authors: Avinash, K, Raju, G Raghavender
• Format: Article
• Language: English
• Subjects: Crude oil prices; Exports; Foreign exchange rates; GDP; Gross Domestic Product; Imports; Openness; Payments; Prices; Sustainability; Tests
• ISSN: 0976-0792

For a developing country like India, Current Account Deficit to a great extent is preordained. Now if the deficit is inevitable, the only way to minimize the risk is by maintaining the current account deficit at sustainable levels. In order to maintain the current account deficit at sustainable levels, we first need to analyze the potential factors which impact the current account balance of our economy. Therefore, the following study focuses on analyzing some of the possible determinants of the current account deficit. In order to analyze the possible determinants of the current account deficit we have made use of the Ordinary Least Squares method of estimation.The results confirm that the gross domestic product, fiscal deficit, crude oil prices, trade openness and lagged value of the current account balance have a positive and significant relationship with Current Account deficit whereas real effective exchange rate has a negative relationship with the current account deficit.We also looked into the long run and short run dynamics of the current account balance. To test the long run relationship, we have used the ARDL - Bounds testing approach. Results obtained from the bounds test confirm that there exists a long run relationship. The error correction model for short term dynamics shows that the error correction term is significant and the coefficient is (-0.40). We further tested the intertemporal sustainability of the current account balance. Results confirm the long run association of Exports and Imports (inclusive of net interest payments abroad) which signifies the sustainability of current account balance. In terms of policy implications, the study show that the expenditure switching policy is redundant in case of India.The Indian economy being more consumption driven supports the "Twin Deficit Hypothesis".