Assessing External Sustainability in India

An Analytical Framework

Author: Mr. Tim Callen and Mr. Paul Cashin

This paper examines the solvency and sustainability of India's external imbalances and analyzes the optimality of its capital flows. We use three approaches: an intertemporal model of the current account that allows for capital controls; a composite model of macroeconomic indicators that yields probabilities of future balance of payments crises; and scenarios that examine the path of the current account consistent with the stabilization of India's external liability-to-GDP ratio. The results indicate that India's intertemporal budget constraint is satisfied and that the path of its current account imbalances is sustainable, with some support for the optimality (given capital controls) of its external borrowing.

Volume/Issue: Volume 1999 Issue 181

Publication date: December 1999

ISBN: 9781451859171

$20.00

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Business and Economics , Exports and Imports , Economics- Macroeconomics , WP , mover accent , balance of payments , cash flow , current account deficit , capital controls , external sustainability , India , balance of payments crisis , current account position , consumption-smoothing model , current account sustainability , current account transaction , short-term debt , current account series , component of the current account , current account adjustment , consumption tilting , Current account , Current account deficits , Current account imbalances , Capital flows , Consumption distribution , Middle East , Global

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Summary

This paper examines the solvency and sustainability of India’s external imbalances and analyzes the optimality of its capital flows. We use three approaches: an intertemporal model of the current account that allows for capital controls; a composite model of macroeconomic indicators that yields probabilities of future balance of payments crises; and scenarios that examine the path of the current account consistent with the stabilization of India’s external liability-to-GDP ratio. The results indicate that India’s intertemporal budget constraint is satisfied and that the path of its current account imbalances is sustainable, with some support for the optimality (given capital controls) of its external borrowing.