The Link between Budget Deficit and Current Account Deficit in Indian Economy

Abstract

The main aim of the article is theoretical and empirical analysis of the causal relationship between the budget balance and the current account balance in India from the period 1990–2013. The article starts with a descriptive statistics to check the presence of normality in the frequency distribution followed by unit root test of non-stationarity. The presence of short-run and long-run relationship among the concerned variables, current account balance and fiscal balance has been tested by applying co-integration test followed by vector error correction mechanism, and finally it ends with Wald–Granger causality test. The results of the Wald–Granger casualty test claim that there exists bi-directional causality among the variables in the long-run whereas, the cointegration test results also conform the long-run association among the variables, and vector error correction mechanism results claim that there is no short-run relationship among the variables. The results indicate that the twin deficits hypothesis does exist in India.