The impact of fiscal Deficit and productivity on current account deficit in India

Kale, S and Rath, Badri Narayan (2015) The impact of fiscal Deficit and productivity on current account deficit in India. The Indian Economic Journal, 63 (3). ISSN 2631-617X

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Abstract

While few studies in India examine the twin-deficit hypothesis and determinants of current account deficit, but there is hardly any study which examines the impact of total factor productivity combined with fiscal deficit on current account deficit. This study made an attempt to examine this issueusing annual data from 1970 to 2013. We first estimate the total factor productivity using Growth Accounting framework. Then in the second step, this paper examined the long-run relationship between these three variables using ARDL bound testing cointegration approach. The results indicatecointegration relationship between current account deficit, productivity shock and fiscal deficits. Further, the coefficients of long-run elasticities show that the rise in fiscal deficit widens the current account deficit and higher productivity reduce the current account deficit in India. Our results are consistent with earlier studies. For policy perspective, India should target in reducing the fiscal deficit and raise total factor productivity growth for reducing the current account deficit

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