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Do Fiscal Deficits Influence Current Accounts? A Case Study of India

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Author Info
Ashok Parikh
Bill Rao

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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. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9361.2006.00370.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Development Economics.

Volume (Year): 10 (2006)
Issue (Month): 3 (08)
Pages: 492-505
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Handle: RePEc:bla:rdevec:v:10:y:2006:i:3:p:492-505

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This page was last updated on 2009-12-19.

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