Impact of fiscal deficit and trade openness on current account deficit in India: new evidence on twin deficits hypothesis

Purpose This study aims to examine the impact of fiscal deficit, exchange rate and trade openness on current account deficit (CAD). The tried empirically investigate ‘twin deficits hypothesis’ ‘compensation in Indian context. Design/methodology/approach Autoregressive distributed lagARDL) bound test approach was used by taking annual time series data from 1978 2021. estimates confirm a significant long-run short-run relationship between dependent variables, i.e. CAD independent variables such as openness. Findings results show that positive shocks all explanatory significantly affect CAD. are associated, coefficient is significant. also found coefficients findings an increase CADs liberal policies help domestic industries grow their expansionary policy, leading higher deficit. negative error correction term suggests disequilibrium converges equilibrium at speed 19.2%. validate Practical implications It can be inferred policy promote economic growth should designed promoted judiciously. An excessive liberalised may other macroeconomic balances. Integrating market with global markets poses big challenge for countries like India aspire penetrate markets. Furthermore, makers rigorously work Fiscal Responsibility Budget Management (FRBM) reduction deficits, imbalances will reduced. Originality/value contributes existing literature deficit’ giving new evidence trilemma designing sustainable spending wisely without imperilling country's presence