Do fiscal deficits influence current accounts? A case study of India

A. Parikh, B. Rao

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18 Citations (Scopus)

Abstract

This paper examines the effects of fiscal deficits on the current account deficits in the Indian economy. In many developing countries, fiscal deficits are mostly financed through monetization, causing crowding out of private investment expenditures. However, fiscal deficits in India are mostly financed through official borrowings from various external sources, leading to higher interest payments and outgoings on the external account. Such a policy could eventually precipitate balance of payments crises despite favorable trade account and real exchange rate. Data over three decades for the Indian economy show that, in addition to the real exchange rate and the ratio of private investment to GDP, fiscal deficits significantly contribute to the current account deficits.
Original languageEnglish
Pages (from-to)492-505
Number of pages14
JournalReview of Development Economics
Volume10
Issue number3
DOIs
Publication statusPublished - 1 Aug 2006

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