Do financial development drive remittances? Empirical evidence from India

Abstract

Remittances being a stable inflow of foreign currency, account for a substantial part of India's Balance of Payment account. In several developing countries, remittances exceed the receipts from the export of goods and services, and even capital flows such as Foreign Institutional Investment, Foreign Direct Investment, and Official Development Assistance. Remittances are known for their countercyclical nature during the sharp economic downturns, compared to other financial flows that are typically procyclical. Hence, it is known as a possible financing source for economic evolution in emerging economic systems. It is essential to determine the elements that drive remittances, as it may enable us to channelize this inflow to reap its developmental potential efficiently. Several macroeconomic determinants of remittances are well researched in the literature by researchers around the globe. However, not even a single study has been given to the financial development, determinants of remittances in the Indian setting. Therefore, this survey is a humble effort to bridge this gap. We utilize multiple regression and autoregressive distributed lag approach to cointegration which finds that several financial developments and financial openness variables have a substantial impact on remittances in the short run as well as in the long run. In accession to that, we incorporate each dummy variable for the global financial crisis and the concurrent negative oil price shock and negative output shock in the host nations. Remittances are found to be resilient during the crisis period while being adversely affected by the adverse economic shocks in the host nations.