Current Account

IRJA-Indian Research Journal, Volume: II, Series: 1. Issue: January, 2015.
ISSN: 2347-7695
Online Available at www.indianresearchjournal.com
A STUDY ON CURRENT ACCOUNT DEFICIT OF INDIA

Author Author
CH. B. V. L. SUDHEER E. PRANAVI
Associate Professor Associate Professor
St. Martin’s Institute of Business Management St.Martin’s Institute of Business Management
Secunderabad, Telangana Secunderabad, Telangana.
Author
DR. CH. VENKATESWARLU
Director of PG Courses
St. Ann's College for Women
Guntur, Andhra Pradesh
ABSTRACT:
This study has been emphasized to corner the factors which were influencing the CAD to get wider in
the past five years few economic variables has been considered for analysis purpose and all the
variables have been averaged yearly. Augmented dickey fuller test has been applied for the stationary
of the data johansen co integration test has been done. Granger causality test shows that currency
fluctuations not cause for the CAD and imports and exports during the analysis period. Gold and
Crude oil were playing a wider role in imports list which is causing cad more than other variables.
This analysis is useful for the research scholars, economist, government institutions and bankers.
Key Words: GDP, IIP, FDI, FII, FD, Imports, Exports, Gold and Currency
INTRODUCTION: Indian economy is facing one of the major economic problem is current account
deficit. This deficit occurs when the total imports of the country exceed exports. The reason for the
India having huge current account deficit is because we are spending and borrowing more from the
external (international) trade. To some extend CAD is a good indicator for the developing countries
because if the Indian industries borrow more from outside the country (ECB and FCCB) to expand
their business activities which leads to growth in the business and economic activities which in turn
leads more revenue in future. The major contributor of India current account deficit is more imports
of gold, electronic items and crude oil. Some of the effects of cad are currency depreciation, inflation
and reduction of credit rating of the country affecting foreign investment.
The govt. generally takes some steps to curb CAD and bring it to sustainable levels. Some of which
are: Decreasing imports and increasing imports. The consumption of gold is more in India. Indians,
irrespective of economic position, are positively inclined towards gold purchase. It is largely driven
by custom, sentiments, marriages, safety concerns, liquidity and tradability. Even though the
government had imposed higher taxes on imports of gold; it does not have much impact due to the
rising level of income of individuals. Other imports like capital goods and machinery, transport
equipment and electronics are necessary for India’s infrastructure growth. Indigenization has reduced
dependence on imports, but in areas like telecom and mining, imports have played a crucial role in
lowering input cost. It is time the government comes out with a clear and concise trade policy with a
IRJA-Indian Research Journal, Volume: II, Series: 1. Issue: January, 2015. ISSN: 2347-7695
roadmap for strengthening India’s global trade. This study has been made to analyze the factors
which influencing CAD to get wider based on some selected economic indicators. Hence there is a
further scope for the study
to the major economic
contributors to cad to get
wider.
From the above graph we can say that the gross domestic product has been increased from
2000-2014 though there is slight changes in current account deficit. The rising of CAD took place
after the GDP had fallen.
OBJECTIVES:
1. To find the currency fluctuations impact on exports and imports of India.

2. To know the impact of gold and crude oil imports on current account deficit.
3. To measure the bivariate relation of select economic variables with cad.
4. To measure the FDI and FII flows impact on rupees v/s dollar.
5. To find the impact of cad on Indian growth rate.
SCOPE: The scope of the study is to analyze the various factors effecting current account deficit
based on some select economic variables and it has been identified that crude oil and gold has wider
impact on current account deficit.
EMPIRICAL STUDY:
GDP- Gross domestic product

IIP- Index of industrial production
FDI- Foreign direct investment
FII- Foreign institutional investor
FD- Fiscal deficit
Imports
Exports
Crude oil
Gold
Currency
Inflation
NEED OF THE STUDY: There are various factors which are influencing the Indian economy. One
such important factor is the Current Account Deficit and thereby resulting increasing external
liabilities and debts. Rising trade deficits creates additional burden on domestic currency for any
nation. This study is conducted to anal size the various factors effecting current account deficit by
considering some economic indicators like gdp, imports and exports, currency.
LITERATURE REVIEW
Omkar K and Shweta Pillai: In this paper it has been discussed that India is facing one of the major
macroeconomic problem is current account deficit. The authors try to investigate the relationship
between current account deficit and foreign direct investment in the context of India. Granger
causality test of Toda – Yamamoto (T-Y) for the period of 1975-2009, the results indicates that the
FDI and CAD are co-integrated in long run. There is evidence of unidirectional causality from FDI
to current account. The analysis of FDI and exports and imports, which are the major contributor of
current account, this paper an attempt has been made to find the impact of FDI on CAD through
impulse response function.
Kavita Rani and Dr. Sanjiv Kumar: Indian has recorded the world’s third largest current account
deficit, which is moving nearly $ 100 billion, driven as a large part by appetite for gold imports in the
world’s biggest consumer of the metal that is playing a major role in driving the rupee to record low
with dollar. The restrictions imposed by the RBI on gold imports gold and silver recorded decline by
12.86 % to USD 24 billion compared to USD 28 billion in the same period last year. Central
government and RBI believed that these measures will help to bring down the current account deficit.
RBI restriction would lead to shortage of gold in market and in domestic market artificial price rise is
expected. This trend again in turn would lead to smuggling, black marketing and hoarding of gold
which is fatal the country economy. To resolve the current account deficit issue, it has to concentrate
the gold imports related problems and appreciate the rupee and boost the Indian economy.
David Backus, Espen Henriksen, Frederic Lambert and Chris Telmer: The US trade and current
account deficits almost reaching 6 % of its GDP figures, some of the economists argued that the
country is on the comfortable zone to ruin and the required adjustment may be painful. They have
suggested that the things are fine: The national savings are recorded very low but the ratio’s of
household and consolidated net worth to GDP to remain high. In authors view, the most stroking
features of the world at present are the low rates growth and investments in most of the richest
countries, whose surplus account for about half of the US deficits. The end result is that the financial
capital if flowing out of countries with low investment and growth into the US and other fast growing
countries.
Manpreet Kaur, Surendra S. Yadav, and Vinayshil Gautam: Current Account Deficit is one of
the major financial problems of India in the year 2011 to 2013. CAD touched record highs of 6.7% of
gross domestic product in the third quarter of fiscal 2012-13. In this study authors are tried to
investigate the relationship between the current account deficit, the Foreign Investment and the
Exchange Rate of the Indian Rupee. Its variables and their movements, they can say that there is
theoretically interdependence between these three variables. The current account deficit is directly
affected by inverse movements of the exchange rate and the Foreign Investments. The Exchange rate
followed by RBI is the rate which is determined by the market. Foreign Investments was influenced
by exchange rate, which are dependent on the monetary policies of world banks. The comparison
between world and domestic economy is another factor that explains the change in the direction of
moment of capital.
Niloufer Sohrabji: In the year 1991 india undertook reforms and liberalized general economy. India
faced current account deficit for most of the period due to reforms. This paper had emphasized
through inter-temporal solvency model Hakkio and Rush and Husted to sustainability of India’s CAD
position over the past one decade. In this framework, inter-temporal solvency constraint is satisfied
provided cointegration between outflow and inflow of the CAD. GLS- dynamic generalized least
square estimation shows a strong relation between country’s inflow and out flows of CAD. This
paper concludes that there is an improvement in trade patterns; Indian CAD position is sustainable.
Prof. Davinder Suri and Prof. Swaha Shome: According to the authors of this paper four risk
factors may impact the Indian economic growth momentum are: DIRE refers to deficits ( current and
fiscal deficits), inflation, recession and exchange rates. In the recent past widening of fiscal deficit in
the country is gaining alarming proportions and compounded by the widening current account deficit.
This paper focused to find whether twin deficits pose serious threat to the growth of the country. In
order to prove this assumption correlation has been applied on inflation, GDP, fiscal and current
account deficit for the period of 1988 to 2011; the analysis depicts that twin deficit hypothesis in
India exists. Both the deficits are having negative relation with GDP and positive with inflation. The
government should focus on fiscal deficit measures to break the vicious cycle of the twin deficits.
Aviral kumar Tiwari: In the paper they have examined the long run relationship between oil and
non-oil exports and imports, in order to see the current account deficit is in sustainable mode. To
achieve this objective the authors had applied co-integration analysis to structural breaks.
Interestingly this analysis had proven that there is strong evidence of a long-run relation between non
oil exports and imports and no evidence in oil exports and imports. This showcase the foreign trade
deficit is sustainable in the Indian context for non oil products.
Ashok Parikh and Bill Rao: This analysis depicts the effect of fiscal deficit on the current account
deficit in Indian economy. In most of the countries fiscal deficit financed through monetization,
causing crowding out of non govt. investment expenditure. In India FD is financed mostly through
official borrowings from the various external sources, this leads to increase of interest rates payments
and outgoing of external account spending. This kind of policy eventually pushes the balance of
payments crises despite favorable trade account and real exchange rates. This study has been focused
on three decades of data pertaining to Indian economy shows that real exchange rate and the ratio of
private investment to GDP and fiscal deficits significantly contribute to the CAD.
RESEARCH METHODOLOGY
This analysis has been done based on the secondary data. Descriptive statistical tools have been
applied for the collected economic variables .all the selected economic variables were averaged to
yearly.
Partial Correlation: This method is to measures the degree of association between two random
variables, with the effect of a set of controlling random variables removed.
Granger Causality Test: the statistical hypothesis test for determining whether one time series is
useful in forecasting another. GCT is also reflecting the impact of one time series with other variable
time series.
Weighted Least Squares: This method involves a standard approach to the approximate solution
of over the determined systems. The Least square method means that the overall solution minimizes
the sum of the squares of the errors made in the results of every single equation.
Qw = ai=1 to n wi (Yi - a0 - a1Xi1 - ... - ap-1Xi,p-1)2
Bi-variate analysis: It involves the analysis of two variables for the purpose of determining the
relationship between variables. In order to see if the variables are related to each other, it is a measure
to know how those two variables simultaneously change together.
T test: This test is used to compare two different set of values. T test is generally applied to normal distribution
which has a small set of values. This test compares the mean of two samples. T test uses means and standard
deviations of two samples to make a comparison. The formula of T test has been given below
Co-integration: This method is a statistical property of time series variables. This test signifies the
data integration between two variables. Two or more time series are co integrated if they have a
common stochastic drift.
Curve Fitting: the process of constructing a curve or mathematical function, that has the best fit to a
series of data points possibly subject to constrains
Augmented Dickey Fuller: This unit root test signifies the stationary of selected variable data. This
test mean t test values along with the probability values reflect the data is proper for analysis.
xt = πxt−1 + εt.
LIMITATIONS:
2013-14 exports data is not available.
The variables are averaged annually.
WPI is considered in this analysis instead of CPI.
DATA ANALYSIS:
1st Objective
Augmented Dickey-Fuller Test Equation

Dependent Variable: D(EXPORTS)
Interpretation: The above analysis augmented dickey fuller test has been applied on exports data to
find stationary: the probability value has been observed one which indicates that the data is stationary
and which can be useful for analysis.
Augmented Dickey-Fuller Test Equation
Interpretation-The above analysis augmented dickey fuller test has been applied on imports data to find
stationary: the probability value has been observed one which indicates that the data is stationary and
which can be useful for analysis.
Interpretation: Co integration test has been applied on exports and imports keeping dollar as
exogenous series and the analysis shows that log likelihood second variable is found to be more than
intercept trend values. Hence data is correlated and co integrated.
Interpretation: Granger causality test has been applied to exports, imports and dollar the test has
rejected in the probability value and no variable is causing each other during the analysis period.
2nd Objective- Weighted Least Squares Analysis
Interpretation: The above analysis weighted least square has been applied to current account deficit,
gold and crude oil .the multiple R-square value is found and the calculated value are fallen in
significance region.
3rd Objective
Interpretation: The above table shows that the economic indicators gross domestic product, index of
industrial production and inflation having relationship with current account deficit. Bivariate
correlation has been applied to measure the relationship between the variables .inflation has been
found negative strong correlation with gross domestic product and index of industrial production. But with
current account deficit it has shown slightly negative correlation gross domestic product has been observed
slightly positive correlation with current account deficit during the analysis period.
4th Objective
Interpretation: T-test has applied to foreign direct investment and rupee v/s dollar and the test has
rejected null hypothesis H0 and accepted alternative hypothesis H1 because the calculated value has
fallen in non significance region. Hence foreign direct investment does not influence currency.
Interpretation: T-test has applied to foreign institutional investor and rupee v/s dollar and the test
has accepted null hypothesis H0 and rejected alternative hypothesis Hence Foreign institutional
investor influence currency.
5th Objective
Cases with a missing value in any variable are excluded from the analysis.
Interpretation: The above picture of linear curve has been applied between current account deficit
and gross domestic product the observed variables are fallen same above the linear curve below linear
curve. Hence current account deficit is having a neutral effect on gross domestic product rate during
the analysis period.
FINDINGS
Inflation has a strong negative correlation with gross domestic product and iip
Granger causality test has been rejected to exports, imports and dollar in the probability value.
Weighted least square analysis has strongly correlated to Gold, crude oil and current account
deficit.
Foreign institutional investor and rupee/s dollar are found to be slightly correlated.
Dickey fuller test has been applied on exports and the probability value has been observed.
Gross domestic product has been observed slightly positive correlated with current account
deficit
CONCLUSION: In study on current account deficit has been concluded with few observations the
analysis has been emphasized during 2009-14. The exports and imports were found to be negatively
correlated augmented dickey fuller test has been applied to find the stationary. Co integration
analysis has proven that the exports and the imports were co integrated but granger causality test has
rejected that they were not causing due to currency fluctuations. Gold and crude oil found to be
influencing more on current account deficit during the analysis period. Hence there is a further scope
for the research to find the major economic variables which were causing current account deficit to
get wider and deeper.
BIBLOGRAPHY
http://investorsareidiots.com (Abstract)
http://www.ijmra.us (Abstract)
http://www.emeraldinsight.com (Abstract)
http://abhinavjournal.com (Abstract)
http://www.i-jibe.org (Abstract)
http://onlinelibrary.wiley.com (Abstract)
http://theglobaljournals.com (Abstract)
http://www.indianjournals.com (Abstract)
http://dbie.rbi.org.in/ (gdp, inflation, iip, exports, imports and fii)
http://dipp.nic.in (FDI)
http://www.worldbank.org
http://indexmandi.com
Conflict of Interest Reported: Nil; Source of Funding: None Reported.

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IRJA-Indian Research Journal, Volume: II, Series: 1. Issue: January, 2015.

A STUDY ON CURRENT ACCOUNT DEFICIT OF INDIA

1. To find the currency fluctuations impact on exports and imports of India.

GDP- Gross domestic product

Augmented Dickey-Fuller Test Equation

Augmented Dickey-Fuller Test Equation

2nd Objective- Weighted Least Squares Analysis

Conflict of Interest Reported: Nil; Source of Funding: None Reported.

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