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“Do Fiscal Deficits Influence Current Accounts? A Case Study of India”
Author(s) -
Parikh Ashok,
Rao Bill
Publication year - 2006
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2006.00370.x
Subject(s) - current account , monetization , economics , balance of payments , exchange rate , monetary economics , crowding out , fiscal policy , investment (military) , fiscal deficit , macroeconomics , balance of trade , international economics , politics , law , political science
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.