Long run sustainability of current account balance of China and India: New evidence from combined cointegration test

Abstract

This paper investigates the long run sustainability of current account balance (CAB) in two fast growing emerging economies of Asia, China and India, using annual data from 1980 to 2014. Sustainability of current account balance is analyzed by examining the long run equilibrium relationship between exports and imports of goods and services. We use the Bayer-Hanck (2013) combined cointegration test to examine the long run relationship between exports and imports. The results indicate that while China has a sustainable current account balance, India's current account balance is not sustainable in the long run. Therefore, in terms of maintaining the growth momentum, India has to enhance the rate of growth of its exports while China has to maintain high levels of export growth, even in an era of sluggish global demand.