The Sustainability of India's current account (1950-2003): Evidence from parametric and non-parametric unit root and cointegration tests

This study conducts an investigation into the sustainability of the Indian current account over the study period 1950-2003. It is argued that a necessary condition for current account sustainability is that exports and imports are cointegrated. After testing for unit roots that allow for a structural break, we employ parametric tests for cointegration: based on Johansen (1995) and Saikonnen and LŸtkepohl (2000) as well as the nonparametric procedure proposed by Breitung (2002) and Breitung and Taylor (2003) that does not assume linearity. By employing these procedures recursively, two distinct regimes are identified characterised by whether or not imports and exports are cointegrated. The regime of non-cointegration runs until the late 1990s and the second regime of cointegration is present after that. This latter regime coincides with the liberalisation of the Indian economy.