Re-assessment of sustainability of current account deficit in India: Insights from threshold cointegration and NARDL analysis

Lingaraj Mallick

Research in Economics, 2025, vol. 79, issue 2

Abstract: I examine the sustainability of CAD by employing both linear and threshold cointegration (Enders and Siklos, 2001) and Engle-Granger (1987) from the period 1960 to 2019. Results of the threshold and Engle-Granger cointegration confirm long-run equilibrium association between exports and imports indicating strong presence of sustainability of CAD in India. This reveals that after certain threshold level of current account deficit i.e., 3%, both export and import have different speed of adjustment towards long-run and their adjustment is asymmetric in nature. These results reveal that after certain threshold level of current account deficit, there should be systematic policy to adjust short-run behaviour of imports to bring back to the long-run for sustainability of current account deficit in India. The policy makers should consider the nonlinear behaviour of current account deficit while formulating any policy prescription towards sustainability of current account deficit in India. The export sector has to be encouraged and the import sector has to be restricted by implementing tight import restricted policies. Further, based on the threshold cointegration and asymmetric error correction mechanism, after estimated threshold, both exports and imports react differently to short-run positive and negative shocks. However, sufficient condition of intertemporal budget constraint is not satisfied by NARDL method. Overall findings conclude that CAD in India is weakly sustainable. Following the empirical results some policy suggestions are suggested.

Keywords: Current account sustainability; Asymmetric autoregressive distributed lag; Threshold cointegration; Asymmetric relationship; Frequency Granger causality (search for similar items in EconPapers)
JEL-codes: C22 F32 F41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:79:y:2025:i:2:s109094432500016x

DOI: 10.1016/j.rie.2025.101039

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