The study examines the sustainability of current account deficit in India from 1960 to 2014 with an application of recent advanced non-liner cointegration method. The study applies threshold cointegration test developed by Enders and Sikols (2001) for the purpose of examining the long-run relationship between exports and imports. The findings reveal threshold cointegration existence with asymmetric adjustment for export and import in India with a long-run coefficient less than one which represents weak sustainability of current account deficits in India. Further, in order to understand the potential asymmetric transmission mechanism between exports and imports, the study has applied asymmetric error correction and the results of asymmetric error correction present unidirectional Granger causality running from export to import. 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 India.
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The study examines the sustainability of current account deficit in India from 1960 to 2014 with an application of recent advanced non-liner cointegration method. The study applies threshold cointegration test developed by Enders and Sikols (2001) for the purpose of examining the long-run relationship between exports and imports. The findings reveal threshold cointegration existence with asymmetric adjustment for export and import in India with a long-run coefficient less than one which represents weak sustainability of current account deficits in India. Further, in order to understand the potential asymmetric transmission mechanism between exports and imports, the study has applied asymmetric error correction and the results of asymmetric error correction present unidirectional Granger causality running from export to import. 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 India.
