Remittances and Dutch Disease in India: An Empirical Investigation using ARDL

Abstract

Workers' remittances are an essential source of capital flows. Some authors considered workers' remittances to be the least volatile flow of capital. Therefore, it becomes all-important to evaluate the impact of workers' remittances and other economic variables on the Real Effective Exchange Rate of Indian currency using annual time series data from 1981 to 2018. Using the Autoregressive Distributed Lag bounds test, our results confirmed the long-run association of variables under study. Empirical findings suggested that remittance inflows appreciate the REER in both the long and short run. Using ARDL estimation, our results found evidence of Dutch disease in the Indian economy induced by inflows of workers' remittances. Regarding other control variables, the only determinant of REER was Terms of Trade, which depreciated the REER in the long and short run. In contrast, other variables only depreciated in the long run. We conducted the Error Correction Model test, revealing that REER converged to the long-run equilibrium path to 40 per cent of the time in successive periods. Also, our results recommend that the inflows of remittances should be formally channelized to some productive channels to reduce the consumption of non-traded goods. Keywords: ARDL, Dutch disease, error correction model, real effective exchange rate, workers' remittances. JEL Codes: C01, F24, F31