This paper examines the short and long-term causes of current account deficit in India. This paper also investigates key determinants of current account for India.
The findings from impulse response functions show that oil price has effect on current account only and the effects of other factors, such as exchange rate, growth, and fiscal balance, are minimal. An analysis of forecasting error variance decomposition suggests that the problem of current account deficit in India be systemic rather than short-term.
The results from an empirical investigation of determinants of current account provide that current account in India is negatively correlated with real GDP, openness and net foreign assets. In accordance with the analysis of short-term effect, no relationship between fiscal balance and current account is detected.
In a long-term perspective, long lasting current account deficit in India looks structural phenomenon. It is an outcome of greater domestic demand than production. Greater amount of outflow of foreign investment than inflow has also contributed to current account deficit. Moreover, structural change in population toward higher proportion of working age population is one of the key factors to give rise to current account deficit in this country and it is inevitable for a fairly long time.