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

• Published date: 01 February 2022
• Author: Manoranjan Sahoo,Hrushikesh Mallick,Mantu Mahalik,Stelios Bekiros
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2311

ACADEMIC PAPER

Factors influencing India's current account balance: Implication

for achieving its external sector sustainability

Manoranjan Sahoo

1

| Hrushikesh Mallick

2

| Mantu Kumar Mahalik

3

|

Stelios Bekiros

4

1

School of Humanities, Kalinga Institute of

Industrial Technology, Deemed University,

Bhubaneswar, India

2

Centre for Development Studies, Trivandrum,

India

3

Department of Humanities and Social

Sciences, Indian Institute of Technology,

Kharagpur, India

4

Department of Economics, European

University Institute, Florence, Italy

Correspondence

Mantu Kumar Mahalik, Department of

Humanities and Social Sciences, Indian

Institute of Technology Kharagpur, Kharagpur-

721302, West Bengal, India.

Email: mkm@hss.iitkgp.ac.in

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 perfor-

mance. 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. Further-

more, the fiscal balance and financial development significantly contribute to the cur-

rent 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.

1|INTRODUCTION

The current account balance (CAB) is one of the key economic barom-

eters to gauge the external sector performance of an economy. For

the emerging countries, witnessing high and volatile current account

imbalances, an important question arises: What are the factors that

determine their CAB, given their some of the common structural fea-

tures or current and future economic challenges. The extant literature

in economies, especially in areas of international trade and energy

economics (Calderon, Chong, & Loayza, 2002; Chinn & Prasad, 2003;

Debelle & Faruqee, 1996; Debelle & Galati, 2007; Huntington, 2015;

Kraay & Ventura, 2000; Yang, 2011), has identified that there are sev-

eral factors that can exert pressure on this indicator, such as fiscal def-

icit or debt burden, capital inflows, international trade openness,

exchange rate and domestic factors like income, population depen-

dency ratio, consumption, investment/savings, financial deepness, etc.

However, taking a look at an individual emerging country perspective

like India which has been attempting to liberalize the economy on a

sustained basis since 1991, after following almost four decades of

planned development strategy since independence, it may rather give

some interesting insight from a developing economy's perspective,

while examining how the Indian economy has been managing its cur-

rent account performance in relation to its other macroeconomic

parameters. How the structural factors are helping the economy to

achieve a CAB and what are the factors that are worsening the CAB?

During the last two and half decades, despite several economic policy

measures undertaken to uplift the economy from its low per capita

growth economic status to faster progressive per capita income

nation status, it has frequently experienced unprecedented imbal-

ances in its balance of payments (BoPs). This is observed in terms of

increasing current account deficits (CAD), along with persistence of

large fluctuations in the international capital flows, combined with a

significant depreciation of the Indian rupee against major international

currencies (USD, Sterling and Euro) and high fiscal deficits. It is also

observed that aftermath of the global financial crisis, 2007–2008,

India's current account had deteriorated sharply and reached a peak

deficit level of 4.6% of gross domestic product (GDP) in 2012–2013

from a minimal deficit of 0.29% of GDP in 2007–2008.

1

At the same

time, the value of the Indian rupee has been continuously remaining

downwardly biased. With frequent volatility in its value, it had experi-

enced a maximum depreciation of Rs 66 per US dollar during

2012–2013 and, at the same time, the overall inflation rate had also

reached to a higher level (Handbook of Statistics on Indian Economy,

Reserve Bank of India, RBI, 2015). Thus, a high and persistent domes-

tic inflation with frequent sharp depreciation of the rupee against

major international currencies has brewed and posed serious

Received: 14 May 2020 Revised: 26 May 2020 Accepted: 19 July 2020

DOI: 10.1002/pa.2311

J Public Affairs. 2022;22:e2311. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of14

https://doi.org/10.1002/pa.2311