Analyzing the Sustainability of India's Current Account Position Following the Reforms of the Early 1990s

Following the 1991 crisis, India undertook reforms that liberalized trade and investment. India faced current account deficits for most of the period following these reforms. This paper analyzes sustainability of India's current account position over the last decade using the intertemporal solvency model of Hakkio and Rush and Husted. In this theoretical framework, the intertemporal solvency constraint is satisfied if there is cointegration between inflows and outflows of the current account. This paper finds cointegration between the series when allowing for a structural break using the Gregory and Hansen procedure. Dynamic generalized least squares (GLS) estimation shows a strong relation between India's current account inflows and outflows. On the basis of the empirical results, this paper concludes that there has been an improvement in trade patterns and despite experiencing deficits, India's current account position is sustainable.