On the Long-run Sustainability of Current Account Deficits in India: Some Insights from Linear and Non-linear Cointegration Tests

Abstract

This article assesses the long-run intertemporal sustainability of the current account deficit in India for the period 1974–2018. We employ various linear and non-linear models, such as the Johansen cointegration test, the non-linear autoregressive distributed lag (ARDL), threshold autoregression (TAR) and momentum autoregression (MTAR) models, to validate the intertemporal budget constraint. The results of the linear cointegration test reveal no cointegration between exports and imports, plus interest payment on external debt. Results from non-linear models, however, provide evidence of cointegration between the variables, implying that the intertemporal budget constraint is validated. The estimates of the TAR model reveal that the current account disequilibrium adjustment process towards the long-run equilibrium follows an asymmetric pattern. Results of the non-linear ARDL model further show that, in the long run, exports react differently to positive and negative changes in imports. Overall, our results show the presence of asymmetries in the current account adjustment process. The estimated cointegrating vector suggests that the current account deficit exhibits weak sustainability. From a policy perspective, the findings recommend implementing suitable macroeconomic and trade policies to reduce the current account deficit. JEL Codes: C30, D90, F32, F34, F40