The fact is that most of the evidence for linking the 1991 BOP crisis to fiscal deficits is hand-waving post hoc ergo propter hoc kind of arguments. The econometric evidence is inconclusive. One of the better studies of the crisis - Cerra and Saxena (2000) - does find a statistically significant relationship running from fiscal deficit to the current account deficit (the so-called twin deficits hypothesis). Other studies have been contradictory. Some of these are summarised and critiqued in my draft paper. I find no econometric evidence of the twin deficit hypothesis in India's case.

Given the limitations of econometric analysis, let us focus on narrative analysis of the economic developments and whether they support the causal mechanisms of the twin deficit hypothesis. At heart, the twin deficit hypothesis stems from an accounting identity: current account deficit (CAD) = fiscal deficit (FD) + domestic private sector deficit (PVD)

Since this is an identity - true by definition - if fiscal deficits increase, then CAD must increase if PVD remains constant. The second if is a big if. In fact, some studies find the causality running from CAD to FD. Nonetheless, it is not hard to imagine that expansionary fiscal policy stokes domestic demand, which in turn spurs imports and causes the CAD to worsen. That argument is unexceptionable. However, the data does not show that this channel was crucial in causing the 1991 crisis. Take a look at imports as a percentage of GDP. Is there any evidence of a surge in the 1980s?