Factors Affecting Traditional and Modern Services Imports in an Emerging Economy: The Role of Real Exchange Rate and Remittances Inflows

Abstract

This study examines the effects of real exchange rate and remittance inflows on total, traditional and modern services imports in India using the autoregressive distributed lag (ARDL) bound testing approach from 1990 to 2020. Banking sector development, stock market development and net foreign direct investment inflows are controlled variables in the estimated services imports functions. The findings from the ARDL long-run model indicate that real exchange rate and remittance inflows inversely affect all service imports. Banking sector development and stock market development positively impact total and traditional services imports. In the case of modern services imports, the banking sector (stock market) inversely (positively) affects it. Net foreign direct investment inflows positively (negatively) affect modern services imports (traditional and total services imports). These findings suggest that policymakers in India should check the adverse effects of real effective exchange rates and remittance inflows on total, traditional and modern services imports. JEL Codes: F14, F31, F24, G21, G10, C32