Abstract

Background: The recent global financial crisis has led to greater imbalance in both the external and the internal account deficits of several countries including India. In this paper, the relationship between India's government budget deficit and current account deficit during the period 1980-2012 is examined.

Method: In order to examine the relationship between budget deficit and current account deficit this study resort to bound testing procedure and standard Granger causality test.

Results: The results show that a cointregrating relationship exists between current account and fiscal balances, exchange rate and real GDP. Existence of cointegration confirms beyond any doubt that the twin deficit hypothesis is very much relevant in the case of India.

Conclusion: Policy makers should continue to focus on fiscal consolidation measures for keeping deficits under control for achieving sustainable current account deficits.

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