Factors influencing India's current account balance: Implication for achieving its external sector sustainability

Abstract

Using annual data for the period 1980-1981 to 2014-2015, the study explores the impact of crude oil imports and real exchange rate on India's current account performance. Utilizing the recent co-integration econometric tools on a current account balance model, the findings contrary to the theoretical prediction revealed that crude oil import significantly improves the current account balance in the long run. Furthermore, the fiscal balance and financial development significantly contribute to the current account performance, whereas real exchange rate, trade openness and age dependency cause deterioration in India's current account balance in the long run.These results have significant policy implications on the sustainability of the current account balance in India.

The Impact of Macroeconomic Factors on Current Account Deficit in ASEAN Countries

“…These countries include Malaysia, Indonesia, Vietnam, Philippines, Cambodia, Myanmar, Singapore, and Laos. Following the model by Sadiku et al (2015), Ozdamar (2016), Destaings (2017), Sahoor et al (2022) and Sumiyati (2022), this study delves into the macroeconomic factors influence the current account (CA). Therefore, the estimation model has been formulated as follows: CA𝑖𝑡 = αₒ + β₁ER 𝑖, + β₂MS 𝑖,𝑡 + β₃TOT 𝑖,𝑡 + β₄OILP 𝑖,𝑡 + β₅IR 𝑖,𝑡 + Ԑ…”

“…When the exchange rate increases or an appreciation of the exchange rate reduces the value of exports and causes a trade balance deficit, it increases or decreases the current account deficit. Empirically, in-depth studies have been done by Astuti, Oktavilia and Rahman (2015), Das (2016), Purwono, Mucha, andMubin (2018), andSahoor et al (2022). These studies showed that the exchange rate negatively influences the current account deficit.…”

“…A negative relationship is found and revealed that improvement in terms of trade means that export price is higher, leading to a decline in real income and export revenue which tends to deteriorate the current account due to lower savings. However, Ozdamar (2016), Sahoor et al (2022) and Sumiyati (2022) have found a positive relationship between the term of trade (TOT) and the current account. Higher terms of trade will lead to higher consumption due to lower prices of imported goods or services.…”

“…Huntington (2015), Basarir and Ercakar (2016), and Bayraktar, Egri, and Yildiz (2016) claimed that a decline in oil prices will improve the current account as it will provide cheap Business and Economic Research ISSN 2162-4860 2023 energy and reduce costs to help the country make a more productive investment for benefit of the current account in long term period. A positive significant influence between oil prices and the current account has been found by Mucuk, Ay, and Gerceker (2013), Yurdakul and Cevher (2015) and Longe, Adelokun (2018) and Sahoor et al (2022). Mucuk et al (2013) for example claim that a decrease in international oil price will lead to higher demand as the price to import is cheaper for oil-importing countries and tends to change the structure of production in the nation and deteriorate its current account.…”

Intertemporal budget constraint and current account sustainability: Evidence from a large emerging economy

“…Therefore, our study reveals that the substantial rise in deficit of the goods account may be a major contributor to the overall unsustainability of the CAD in India. More precisely, structural reasons such as inelastic demand for oil imports and sectoral constraints may be to blame for India's unsustainable goods account (Rangarajan & Mishra, 2013; Sahoo et al, 2020). As a result, structural reforms targeted at restoring trade competitiveness and improving the export position in the products market will assist India's goods account balance as well as its overall CA situation.…”