‘One sows, another reaps’: Analysing the asymmetric impact of remittance inflows on the trade balance in a large emerging economy

Abstract

Remittances are regarded as an important source of foreign exchange for the majority of low and middle-income countries, and thus have the potential to impact their aggregate economic activities. The current study investigates the impact of remittance inflows and international oil prices on India's trade balance from 1975 to 2020. We use a non-linear autoregressive and distributed lag model to examine the asymmetric impact of remittance and oil price changes on trade balance. The study discovered that rising remittance inflows have a detrimental long-run impact on the trade balance. It also demonstrates that while a positive oil price shock worsens the trade balance, a negative oil price shock improves it in the long run. As a result, the paper emphasises the need to reduce skilled migration, properly channel remittance revenues, develop financial institutions, and implement more efficient exchange rate policies in order to achieve long-term trade surpluses.