Do Fiscal Deficits Influence Current Accounts? A Case Study of India

14 Pages Posted: 15 Jan 2007

See all articles by Ashok Parikh

Ashok Parikh

University of East Anglia

Bill Rao

University of South Pacific


This paper examines the effects of fiscal deficits on the current account deficits in the Indian economy. In many developing countries, fiscal deficits are mostly financed through monetization, causing crowding out of private investment expenditures. However, fiscal deficits in India are mostly financed through official borrowings from various external sources, leading to higher interest payments and outgoings on the external account. Such a policy could eventually precipitate balance of payments crises despite favorable trade account and real exchange rate. Data over three decades for the Indian economy show that, in addition to the real exchange rate and the ratio of private investment to GDP, fiscal deficits significantly contribute to the current account deficits.

Suggested Citation

Parikh, Ashok and Rao, Bhaskara, Do Fiscal Deficits Influence Current Accounts? A Case Study of India. Review of Development Economics, Vol. 10, No. 3, pp. 492-505, August 2006, Available at SSRN: or

Ashok Parikh (Contact Author)

University of East Anglia ( email )

Norwich, Norfolk NR4 7TJ
United Kingdom
+44 0 208 580 0661 (Phone)

Bhaskara Rao

University of South Pacific ( email )

Laucala Campus

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