On the estimation of the determinants of the current account deficits:: a case of Indian economy

The performance in the current account of the balance of payments of India remains as a political and controversial issue and hence attracted considerable attention in recent years. To our knowledge very limited work has been done on the determents of the current account deficits especially after liberalization in India. Using vector error correction mechanism, Variance decomposition and Johansen Cointegration technique we have identified the short run as well as long run determinants of the current account deficits. Empirical findings suggest that there is a significant long run equilibrium relationship between current account deficit and investment, savings &openness of the economy. The openness of the economy influenced current account deficits by 33.96% where as fiscal deficit, savings, real exchange rate and output gap put together influenced the current account by 35.42%.