Capital controls, capital flows and external crises: evidence from India

Despite the widespread use of capital controls, India has experienced several balance of payments crises. This paper examines the solvency and sustainability of India's external imbalances and analyses the optimality of its capital flows. We use two approaches: an intertemporal model of the current account that allows for capital controls, and a composite model of macroeconomic indicators that yields probabilities of future balance of payments crises. The results indicate that India's intertemporal budget constraint is satisfied and that the path of its current account imbalances is sustainable, with some support for the optimality (given capital controls) of its external borrowing.