Do financial development drive remittances? Empirical evidence from India

• Published date: 01 February 2022
• Author: Jijin Pandikasala,Iti Vyas,Nithin Mani
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2269

ACADEMIC PAPER

Do financial development drive remittances? Empirical

evidence from India

Jijin Pandikasala

1

| Iti Vyas

2

| Nithin Mani

3

1

Madras Institute of Development Studies

(MIDS), Chennai, India

2

ICFAI Law School, IFHE, Hyderabad, India

3

Department of Humanities and Social

Sciences, Indian Institute of Technology

Kharagpur, Kharagpur, India

Correspondence

Iti Vyas, ICFAI Law School, The ICFAI

Foundation for Higher Education,

Dontanapally, Shankarpally Road, Hyderabad

-501203, India.

Email: iti.savernika@gmail.com

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 devel-

opmental 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 open-

ness 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.

1|INTRODUCTION

Migration and remittances have always been an exciting arena for

economic experts around the earth. However, the fundamental ques-

tions that pop up in the minds of the researchers and policymakers,

which are not settled well in the literature are as follows. What is the

role played by remittances in development? Are they countercyclical

toward the economic fluctuations in the home nation? What are the

key variables that drive the remittance inflow to the developing

countries?

Remittances are fundamentally a transfer of money as pay-

ment or gift from migrants to their folks or other people in their

domicile state. It primarily represents the household income aris-

ing out of the migration of people in foreign countries. It includes

cash and non-cash items which occur either through the formal

or informal channel. Free transfers, extended across borders are

generally not read in national reports. Formal channels include

regulated institutional channels like banks, nonbank financial

institutions, postal service positions, and money transfer opera-

tors (e.g., Western Union and Money Gram). Unregistered money

transfer businesses happen through “semi-formal”and “informal”

channels such as Hawala, couriers, and cash or kind carried by

either oneself or sent via friends or relatives. Advanced H awala

in Pakistan and Hundi system in India allow the fast and cheap

transaction and relies on an extended network of brokers. This

kindofinformationisnotadequatelycoveredinthecurrentBal-

ance of Payment (BoP) since it is hard to answer for the informal

remittance transactions.

Received: 22 May 2020 Revised: 13 June 2020 Accepted: 5 July 2020

DOI: 10.1002/pa.2269

J Public Affairs. 2022;22:e2269. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of12

https://doi.org/10.1002/pa.2269