Estimating the Relationship Between the Current Account, the Capital Account and Investment for India

Abstract

Causality from the capital account (KA) to the current account (CA) of the balance of payments indicates disruption from capital flows while the reverse can indicate smooth financing of the CA that allows investment to exceed domestic savings. A three-variable vector autoregression tests for Granger causality between the Indian CA, KA, KA components, and gross fixed capital formation (GFCF) over 2000–01Q1 to 2015–16Q3. Since a CA deficit indicates an excess of investment over savings it is useful to estimate which type of capital flows affect investment. No causality is found to exist in any direction between the KA and the CA. There is only indirect causality through some components. Of the capital flow components, only FDI affects GFCF. The latter consistently affects the CA. The CA affects debt portfolio flows and non-resident deposits, suggesting these were used to finance the CA, but they were not causal for GFCF. Volatile flows, therefore, did not deteriorate the CA, but they also did not contribute to GFCF. India’s gradual KA convertibility may have mitigated shocks from the KA. Long-term sustainability, however, requires FDI to increase as compared to other types of flows. JEL Codes: F21, F32

Macroeconomic Variables, Demographic Factors and Current Account Balance in Nigeria: A Causal Relationship

“…Gruber & Kamin (2005) argued that more significant current account balances are associated with greater per capita incomes, lower changes in growth, higher fiscal balances, higher net foreign asset positions, lower shares of youth and elderly in the population. Goyal and Sharma (2019) find no causality in any direction between the capital account and the current account. There is only an indirect causality through some components.…”

“…On the other hand, there is no reverse causation from the current account balance to investment. Goyal and Sharma, (2019) show that there is a causality moved from gross fixed capital formation to current account balance, implying that investment widens the current account deficit. Likewise, among the determinants or components of investment, only the income growth (INCG) Granger caused current account balance (CABGDP).…”

Current and Capital Account Dynamics in India: An Empirical Analysis of the Post-Reform Period

“…However, causality exists indirectly through the real exchange rate. Goyal and Sharma (2019) used the vector autoregression (VAR) analysis to test the causality with investment as a control variable. They found no direct causality between CA and KA but indirect causality through some components of KA.…”