Reassesment of sustainability of current account deficit in India.

Abstract

In this study, we examined the long-run relationship between oil and non-oil exports and imports, in order to see whether the current account deficit in India is sustainable. To achieve our objective we have carried out cointegration analysis with structural breaks (as unit root analysis of both variables shows that these variables have been subject to structural changes). Interestingly, we found that there is a strong evidence of a long-run relationship between non-oil exports and imports and no evidence in the case of oil exports and imports. This implies that a foreign trade deficit is sustainable in the Indian context for non-oil commodities but not for oil commodities.