Explaining India’s Current Account Deficit : A Time Series Perspective

The purpose of this paper is to examine the issue of high current account deficit (CAD) from various perspectives focusing its behaviour, financing pattern and sustainability for India. The study found that the widening of CAD is due to fall in household financial savings and corporate investments. Also, it was found that a large part of India’s CAD has been financed by FDI and portfolio investments which are partly replaced by short-term volatile flows. The unit root and cointegration tests indicate a sustainable current account for India. Further, econometric analysis reveals that India’s current account is driven by fiscal deficit, terms of trade growth, inflation, real deposit rate, trade openness, relative income growth and the age dependency factor