Economic Change and Restructuring (2022) 55:1229–1248

https://doi.org/10.1007/s10644-021-09347-3

Macroeconomic determinants of remittances to India

P. Jijin1 · Alok Kumar Mishra2 · M. Nithin3

Received: 26 May 2020 / Accepted: 25 August 2021 / Published online: 1 September 2021
© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature
2021

Abstract
Migration and remittances have always been an exciting arena of research for econo-
mists around the globe. Remittance flows have evolved as a significant economic
variable over the past decade. In several developing countries, remittances exceed
the other capital inflows and value of total exports. Thus, it is widely recognised as
a potential funding source for economic development in emerging economies. The
inflow of remittances to India has increased tremendously in the recent past making
the country the highest recipient of remittances across the globe. Remittances are
an essential component that contributes to narrowing the Current Account Deficit
and has always been a stable constituent of the Balance of Payment. This paper is
an attempt to explore the vital macroeconomic variables which determine the remit-
tance flows to India. Notably, we enquire into the dominant motives of remittances
in the Indian context. We employ an ARDL approach to cointegration to identify
the macroeconomic determinants of remittances and find those crucial variables
such as exchange rate, oil price, and domestic GDP substantially impact the flow of
remittances. The results also indicate that the migrants are more vulnerable to the oil
price shocks in host countries. The overall findings of our study are that (1) remit-
tances are not countercyclical in the Indian context (2) remittances are subject to
weak investment motive as opposed to the altruistic motive.

Keywords Remittances · Altruistic motive · Investment motive · ARDL ·

Cointegration

JEL Classification F24 · F22 · E20 · C32

* Alok Kumar Mishra

[email protected]
Extended author information available on the last page of the article

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1230 Economic Change and Restructuring (2022) 55:1229–1248

1 Introduction

Remittances have emerged as a significant contributor to the development of

many emerging economies over the last few decades. Remittances are funda-
mentally a transfer of money as payment or gift from emigrants to their fami-
lies or other individuals in their home country. It primarily represents “household
income from foreign economies, arising mainly from the temporary or permanent
movement of people to those economies” (IMF 2009). The remittances are the
second-largest foreign currency source in the world economy, and it forms a sig-
nificant part of the Balance of Payment (BoP) account in most developing coun-
tries. In several emerging economies, remittances exceed the value of total export
as well as the capital flows such as a Foreign Portfolio Investment (FPI), Foreign
Direct Investment (FDI), and Official Development Assistance (ODA) [World
Bank, 2018]. In 2019, total global remittances exceeded $700 billion. The share
of Low- and Middle-Income Countries (LMICs) constitutes around $550 billion
(World Bank 2021), nearly three times the foreign aid inflows.
The World Bank (2021) reports that the remittances to LMICs declined by 1.6
percent in 2020 owing to the Covid-19 crisis. However, the decline in remittances
is far lower than the decline in FDI inflows (11%, World Bank 2021). Further, this
fall is lesser than the decline recorded during the global financial crisis in 2009.
It signifies the resilient behaviour of remittances during a crisis. The only other
instance of a drop in remittances in recent history was during 2015–2016 when
the remittances to LMICs plummeted by 1.3%. It may be due to the weakening of
the US dollar and the financial tightening of host countries resulting from the oil
price crash. At the same time, the employment opportunities for Indian migrants
were also limited by the stringent nationalisation policies of Gulf Cooperation
Council (GCC) countries, especially Saudi Arabia (World Bank 2018,2021).
Given the expected global economic recovery from the pandemic, World Bank
(2021) projects the rebound of remittances to $553 billion (an increase of 2.6%)
to the developing countries in 2021.
In the literature, it is well recognised that a stable flow of remittances undoubt-
edly has a substantial role in developing countries. Based on a quantitative survey
of the literature, Cazachevici et al. (2020) find that the mean effect of remittances
on economic growth is positive but economically small. Remittances are a cata-
lyst for financial sector development, through its significant contribution to the
credit market development and the outreach of financial services (Giuliano and
Ruiz-Arranz 2009; Aggarwal et al. 2011; Cooray 2012; Anzoategui et al. 2014;
Fromentin 2017; Bangake and Eggoh 2020). In low- and middle-income coun-
tries, remittances have a positive long-run impact on both household credit and
firm credit (Fromentin and Leon 2019). It also mitigates growth volatility, espe-
cially in countries with high financial development status (Chami et al. 2008;
Ahamada and Coulibaly 2011). Many studies also observe the capacity of remit-
tances in both physical and human capital accumulation, and poverty and inequal-
ity reduction, as it directly impacts income distribution (Imai et al. 2014; Jouini
2015; Bang et al. 2016; Akobeng 2016; Ahmed et al. 2018; Akter 2018). The

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Economic Change and Restructuring (2022) 55:1229–1248 1231

welfare gains are high when the internal distribution of remittances is skewed
towards entrepreneurs (Bahadir et al. 2018). However, few studies argue that the
remittances-growth effect is country-specific, where institutional and develop-
ment factors and cultural idiosyncrasies have a profound role in determining the
outcome of remittances (Kadozi 2019; Piteli et al. 2019).
Since India is the largest remittances receiver, one cannot undermine the signif-
icance of remittances in its development process. Several macroeconomic studies
reveal that remittances contribute to India’s current account deficit by financing a
large part of the balance of the trade deficit. Moreover, remittances have positive
implications for the overall output growth through their direct utilisation for con-
sumption and investment (Gupta 2006; Pande 2018; Singh and Hari 2011; Noushad
et al. 2020). However, little attention has been paid to explore the macroeconomic
determinants of remittances in the Indian context. Understanding the key factors
affecting remittances at the macro-level may help design policies to ensure uninter-
rupted inflow. Therefore, the study contributes to the literature by identifying the
macroeconomic determinants of migrants’ transfers to India. To this end, we use
the ARDL bound testing approach [following Pesaran and Shin (1995) and Pesaran
et al. (2001)] to identify the presence of a long-run equilibrium relationship.
The key findings of the study suggest that exchange rate, oil price, and domestic
GDP have a substantial impact on India’s inward remittances. The study also finds
that pure altruism does not dominate the underlying motive for remittances to India.
Moreover, the inflows are found to be procyclical. Remittances have a long-run equi-
librium association with the exchange rate, oil price, and domestic GDP, and any
shock to these variables quickly converges to the long-run path. The Indian migrants
(mostly in gulf countries) are more vulnerable to the oil price shocks. Therefore,
we suggest that the policies be framed to protect the vulnerable migrants from the
relentless external economic shocks. Providing them with investment opportunities
in their country of origin may ensure a stable inflow of remittances. Also, protective
policies are the need of the hour against the backdrop of the Covid-19 crisis.
The rest of the paper is organised as follows. The trajectory of remittances to
India is briefly outlined in section two. The third section briefly explores the current
literature on the macroeconomic determinants of remittances. The fourth section
describes the data used and the methodology employed to discover the link between
remittances and macroeconomic variables in the Indian context. The fifth section
presents the empirical results and discussion, followed by a conclusion in the sixth
section.

2 Remittances to India: some highlighted facts

Since 1991, remittances have evolved as a prominent component of the current

account of Balance of Payment (BoP) in India (Gupta 2006; Pande 2018)1. An
initial surge in remittances observed in the 1970s and 1980s (sprouted from the
oil price boom in the Middle East) benefited India’s foreign exchange reserves
(Pande 2018). This growth has sped up in the post-reform period following the
information technology revolution and exhibited steady progress up to 2003.

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1232 Economic Change and Restructuring (2022) 55:1229–1248

Table 1  Remittance Inflows to India (US$ Billion). Source: World Bank

Year 1990 1995 2000 2005 2010 2014 2016 2018 2019

Personal remittances 2.39 6.22 12.85 22.13 53.48 70.39 62.74 78.79 83.13

90

80

70

60
Billion US$

50

40

30

20

10

0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Fig. 1  Remittances to India. Source: KNOMAD, World Bank

Subsequently, India emerged as a top remittance recipient in the world. For exam-
ple, the reported remittances from overseas Indians are a modest $2.39 billion in
1990 and have grown to $53.48 billion in 2010 and $83.13 billion in 2019 (see
Table 1). The increase during the 1990s is mainly attributed to the shift of emi-
gration from developing to the developed countries like the USA, Canada, and
Australia and the increasing share of highly skilled workers (Pande 2018). More-
over, financial sector reforms and the transaction cost reduction might have like-
wise led the remittances towards the formal channels (Giuliano and Ruiz-Arranz
2009).
However, the growth of remittances in the 1990s pales compared with its abrupt
growth to $50 billion in 2008 from a below $20 billion in 2004. The increased glo-
balisation resulting from the liberalised policies of the government, growing effi-
ciency among commercial banks and money transfer units, the promising profile of
recent emigrants could trigger the healthy inflow of remittances to India. The remit-
tances were resilient during the initial period of the global recession of 2008, as
Fig. 1 indicates. All the same, it was accompanied by a slight decline and recov-
ered immediately to the above-trend level. The remittances were at their historical
record of approximately $70 billion in 2014. Nevertheless, it declined to $62 billion
in 2016. The fall is attributed to the anti-immigration sentiments and nationalisa-
tion policies, especially in the Gulf region, which is the foremost destination for the
Indian diaspora (World Bank 2018; Pandikasala et al. 2020).

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Economic Change and Restructuring (2022) 55:1229–1248 1233

It has been observed that migrants’ transfers are a stable form of foreign inflows
to India as its volatility is lesser than that of other inflows like FPI and FDI (Pandi-
kasala et al. 2020). The enormous flow of remittances has helped India offset the
detrimental impact of the trade deficit on the current account deficit (Gupta 2006).
Thus, it is indispensable to give ample attention to the host and home country fac-
tors that drive the remittance inflows to India.

3 Review of literature

The theoretical debate on remittances was triggered in the 1980s, especially after the
path-breaking paper by Lucas and Stark in 1985.2 Since then, the empirical studies
rest upon the two motives behind remittances: altruism and self-interest. ‘Pure altru-
ism’ as in Lucas and Stark (1985) is a simple model in which the migrant’s utility is
derived from the utility of the dependent households. As per this theory, remittances
should increase as the recipient household’s income decreases. More precisely,
a one-unit increase in the income of the migrant, coupled with a one-unit drop in
the recipient household’s income, should raise the remitted amount precisely by the
same unit. Another motive, the self-interest emerges from the migrant’s aspiration to
accumulate assets at home [see Rapoport and Docquier (2006) for a detailed survey
of the theory on motives to remit].
By and large, remittances are either driven by altruistic or self-interest motives.
In the former case, remittances are countercyclical, and in the latter, they are procy-
clical (De et al. 2019). Altruistically motivated remittances smoothen the consump-
tion pattern of recipient households. It also serves as insurance against any adverse
events in the home country (Stark 1995; Gubert, 2002). Given the core concept of
the motive of remittances, macroeconomic studies attempt to understand the under-
lying factors that drive remittances, especially to the developing countries.3
De et al. (2019) say that “if the motivations are altruistic, remittances will increase
when the receiving economy is in a downturn and vice versa. This would imply a
negative relationship between remittances and recipient economy GDP resulting in
counter-cyclicality.” In the time of financial distress, remittances perform above the
trend growth in developing countries. Remittances are resilient during the financial
crisis, while other foreign inflows are weak (De et al. 2019). Bouhga-Hagbe (2004)
finds that remittance flows are countercyclical to the episodes of declining output
and employment in the home country. Anwar and Mughal (2012) argue that altru-
ism is the most likely motive behind remittances sent by Pakistanis living abroad.
Mughal and Ahmed (2014) also find the counter-cyclicality of remittances in India
and Pakistan, while procyclical in Bangladesh and Sri Lanka. They argue that the
size of remittances concerning domestic output determines its response to the busi-
ness cycle fluctuations. If the remittances are countercyclical, it may mitigate the
income fluctuations in the receiving country. Thus, the potentiality of remittances
can be evaluated by their pattern during economic downturns.
However, De et al. (2019) find that remittances are acyclical in 80 percent of 109
countries (mainly developing and emerging market economies). Moreover, remit-
tances appear to be procyclical in many high remittance-receiving countries. If the

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1234 Economic Change and Restructuring (2022) 55:1229–1248

remittances are procyclical, it tends to amplify the output fluctuations in the home
country (Chami et al. 2008). In an empirical study using a sample of 12 develop-
ing countries, Sayan (2006) also finds evidence against the counter-cyclicality of
remittances. Lim and Morshed (2015), a study based on 122 developing countries,
observes that the income contraction in home countries does not induce the migrants
to remit more.
Past macroeconomic studies have incorporated several variables to deal with the
debate over different motives of remittances. Those studies account for host and
home country factors, like national income, unemployment, inflation, interest rates,
exchange rate volatility, oil price movements, etc. Moreover, aspects like migrant
stock, financial development, foreign exchange restrictions, and political risk also
received significant attention in the literature on remittances.
The migrant stock is considered to be the prime determinant of remittances.
There is a positive association between migrants’ population and remittance flows
(Kakhkharova et al. 2017). Freund and Spatafora (2008) show that an increase in
migrant stock leads to a proportionate increase in foreign remittances in OECD
countries. This relationship also holds in Turkey, which is unitary elastic (Elbadawi
& Rocha 1992).
Further, the economic condition of the source country and destination country of
migrants is also an essential determinant of their income transfer. A more significant
gap between the destination and source countries leads to more remittance inflows
in middle-income countries (Yoshino et al. 2020). Remittances are closely associ-
ated with the economic activity in the host countries, with a positive affiliation to the
income cycles (Elbadawi & Rocha 1992; El-Sakka and McNabb 1999; Vacaflores
2018). Gupta (2006) and Jadhav (2003) also find the significant impact of the host
country’s economic condition on India’s remittance receipts. However, Mughal and
Ahmed (2014) find an acyclical behaviour of remittances to the external economic
shocks, as skilled migrants at large in those regions are least affected by it. During
the global recession of 2008, remittance inflows to the developing economies were
plummeted, primarily due to the risen unemployment in the host economies. How-
ever, private transfers to India were resilient to the different episodes of financial
crisis around the globe (Gupta 2006; Imai et al. 2014; Pandikasala et al. 2020).
A positive relationship with the interest rate variables suggests that the remit-
tances are more attracted by the investment return (Aydas et al. 2005; Adams 2009).
For example, Ojede et al. (2019) find that a substantial increase in the domestic
interest rate compared to the foreign interest rate makes domestic assets more attrac-
tive to the emigrants from Uganda. On the other hand, a weak investment motive is
also shown by the insignificant interest rate differential estimates (Schiopu and Sieg-
fried 2006; Chami et al. 2008). The NRI deposits to India are affected by interest
rate differences between home and host countries, while the inward remittances are
not (Gordon and Gupta 2004; Gupta 2006).
Inflation discourages investment opportunities in the home country, adversely
affecting remittances (Elbadawi and Rocha 1992; Aydas et al. 2005). Abbas et al.
(2017), a Pakistan-based study, argue that an inverse relationship between remit-
tances and inflation signifies less investment by migrants due to the unstable macro-
economic condition. Conversely, a positive relationship of remittances with inflation

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Economic Change and Restructuring (2022) 55:1229–1248 1235

can be an indication of the altruistic motive. It is due to the extended support of

migrants towards their families during a rise in the cost of living (El-Sakka and
McNabb 1999).
The exchange rate also affects remittances as the sum of two opposite effects:
wealth effect and substitution effect (Akçay and Karasoy 2019). A rise in the value
of money earned in foreign currency increases the purchasing power of migrants in
terms of domestic currency, thereby inducing the wealth effect among the receiving
households. The migrants with investment motives exploit the exchange rate fluc-
tuations and send more money to the home country to accumulate durable or fixed
assets. This positive impact of domestic currency depreciation on remittances is
found in Pakistan and India in the long-run (Akçay and Karasoy 2019; Abbas 2020).
On the contrary, Ojede et al. (2019) point out that domestic currency depreciation
reduces remittances to Uganda. When the dollar equivalent of debt incurred by emi-
grants during the initial period of migration decreases, they tend to repay the debt.
In addition, domestic inflation caused by currency depreciation would prompt them
to remit more.
The prevalence of exchange rate restriction shifts the remittance inflows from
the formal channel to the informal channel. The migrants divert their remittances
towards the black-market as the difference between the official and black-market
rates widens, and they get an extra return. Thus, the exchange rate controls discour-
age formal remittances due to the black-market premium (El-Sakka and McNabb
1999; Elbadawi and Rocha 1992; Aydas et al. 2005). The black-market exchange
rate premium significantly abates the formal remittances to Nigeria and Venezuela
(World Bank 2017). Therefore, a flexible exchange rate policy may promote the
inflow of remittances through formal channels.
A high sending cost can switch remittances towards the informal routes. Freund
and Spatafora (2008) find that a 1 percent rise in transaction cost can reduce the
recorded remittances by 14–23 percent. The global average cost of sending remit-
tances is recorded at 6.67 percent in 2020, remarked as a progress towards the G20
commitment to reduce the transaction cost to 5 percent. However, it is significantly
above the 3 percent target set in the United Nations ‘Sustainable Development Goals
(SDG)’ (World Bank 2020). The migrants respond to the reductions in transaction
costs by sending more remittances to their home countries.
The transaction cost in any economy is systematically related to its financial
development status. A country with a better financial system brings more remit-
tances (Aggarwal et al. 2011; Coulibaly 2015). Thus, informal channels will be less
in the countries with a well-built financial system. However, the domestic credit-to-
GDP ratio, a financial depth indicator, negatively impacts India’s remittance (Pan-
dikasala et al. 2020). That points towards the substitutability of remittances with
private credit for migrant households.
Apart from the factors mentioned above, several non-economic factors can also
influence remittances. Political instability and other natural hazards go a long way
in altering the regular inflow of remittances. For instance, the prevalence of democ-
racy helps to receive more remittances for Pakistan (Abbas et al. 2017). Aydas et al.
(2005) find that the political instability during the military regime in Turkey reduced
its remittance inflows. During natural calamities, remittances play a supporting role

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(Yang and Choi 2007), indicating the altruistic motive. However, Lim and Morshed
(2015), based on a large panel study, find that a fall in income caused by weather
shocks or natural disasters does not induce the migrants to remit more. Moreover,
Lueth and Ruiz-Arranz (2006) show that remittances are not associated with natural
disasters in European and Asian countries. Similarly, Gupta (2006) finds an insig-
nificant response of remittances to the periods of drought, geopolitical tensions, and
political uncertainty in India.
The literature is not offering conclusive evidence for a universal cause and effect
relationship between the remittances and macroeconomic variables. Therefore, the
sign of the relationship of remittances with the rest of the macroeconomic variables
is still ambiguous. The inconsistent results across the studies are commonly attrib-
uted to the remittances’ varying degree of significance in the receiving countries
(Mughal and Ahmed 2014). A country-specific study could effectively capture the
response of remittances to macroeconomic fluctuations.

4 Data, variable description, and methodology

4.1 Data

Data used for this study are collected from the RBI data warehouse (Handbook of
Statistics on the Indian economy), FRED (data bank of the Federal Reserve Bank of
St. Louis), and Organisation for Economic Cooperation and Development (OECD)
website. A comprehensive description of the variables is given in Table 2. We use
quarterly time-series data of variables for the period from 1996: Q2 to 2019: Q4.
The selection of the sample is based on the availability of data on the desired fre-
quency. It is important to note that the previous studies on remittance have taken
only annual data for estimation. This study enables us to discover the relationship
among variables at a comparatively high-frequency level and helps build a robust
model and capture better dynamics.

4.2 Variables description and descriptive statistics

We provide a brief description of the variables used for the study in Table 2. Table 3
reports summary statistics of all the variables.
It can be observed from Table 3 that the mean and the standard deviation of
domestic GDP (gdp) and US GDP (usg) is extremely high. Both the variables
have higher dispersion compared to other variables. All the variables are positively
skewed except US GDP. The coefficient of kurtosis is negative for all the variables
except relative inflation and stock market differential indicates that a distribution is
flat and has thin tails. This implies that the distribution is platykurtic. The positive
coefficient of relative inflation and stock market differential follows a leptokurtic
distribution with a higher peak and taller tails than a normal distribution.
Table 4 reports the correlation among the variables under the study. We observe
that all the variables except stock market differential (smd) are significantly

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 Table 2  Variables descriptions. Source: Authors’ compilation
Abbreviation Variable Description Source

rem Remittances to India Foreign remittances sent by migrants to India (Billion USD). It is termed as Handbook of Statistics on Indian Economy, RBI
“Private transfers” in Balance of Payment
gdp Home country GDP Gross Domestic Product of India(Billion INR). Spliced to 2011 series. Season- Handbook of Statistics on Indian Economy, RBI
ally adjusted
ner Nominal exchange rate Nominal exchange rate of INR vis-à-vis USD Handbook of Statistics on Indian Economy, RBI
Economic Change and Restructuring (2022) 55:1229–1248

oil Oil price Global crude oil price (Brent). Measured in USD per barrel FRED, Federal Reserve Bank of St. Louis
usg Host country GDP Gross Domestic Product of USA (Billions of Chained 2012 Dollars). Season- FRED, Federal Reserve Bank of St. Louis
ally adjusted
ird Interest rate differential Difference between Treasury Bill and LIBOR RBI & FRED
inf Relative inflation Difference between the Indian inflation (INF) and USA inflation (USU) OECD & FRED
smd Stock market differential Difference between the stock market returns of India (BSE SENSEX) and RBI & FRED
United States (NASDAQ)
1237

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1238 Economic Change and Restructuring (2022) 55:1229–1248

Table 3  Summary statistics. Source: Authors’ estimation

Variable Mean Median Mode Range Variance SD Skewness Kurtosis

rem 10.61 10.97 2.38 19.55 38.48 6.20 0.03 − 1.62

gdp 18,894.54 17,379.72 8097.37 28,669.31 75,172,686.75 8670.22 0.54 − 0.93
ner 50.83 46.63 35.64 36.43 104.01 10.20 0.66 − 0.83
oil 57.60 54.95 11.09 111.15 1047.65 32.37 0.43 − 0.94
usg 15,258.12 15,436.04 11,096.98 8124.99 4,515,768.27 2125.03 − 0.07 − 0.78
ird 4.31 3.69 − 0.50 10.80 5.25 2.29 0.47 − 0.45
inf 4.57 4.24 − 2.16 18.49 13.90 3.73 0.78 0.36
smd 0.004 0.003 − 0.24 0.53 0.01 0.09 0.11 0.87

Table 4  Correlation matrix. Source: Authors’ estimation

rem gdp ner oil usg ird inf smd

rem 1
gdp 0.94*** 1
ner 0.79*** 0.92*** 1
oil 0.75*** 0.54*** 0.30** 1
usg 0.92*** 0.97*** 0.87*** 0.62*** 1
ird 0.63*** 0.50*** 0.51*** 0.59*** 0.45*** 1
inf 0.25* 0.10 − 0.02 0.25* 0.01 0.29** 1
smd − 0.07 − 0.06 − 0.03 − 0.02 0.05 − 0.21* − 0.23* 1

. The asterisk signs ***, **, * represent level of significance at 1%, 5% and 10%, respectively

associated with our variables of interest. The high pairwise statistically significant
correlation coefficient is found between domestic GDP and remittances; US GDP
and remittances; nominal exchange rate and domestic GDP; host country GDP and
home country GDP; nominal exchange rate and US GDP. The low negative cor-
relation was found between the pair of relative inflation and interest rate differen-
tial; relative inflation and stock market return differential; and between inflation and
stock market differential. We also observe that remittances are positively associated
with all variables except stock market differential, which is negatively correlated and
statistically insignificant. This result will help us in lateral analysis and estimation.

4.3 Methodology

To examine the key macroeconomic determinants of remittances to India, we

employ the ARDL bounds testing approach to cointegration following Pesaran
and Shin (1995) and Pesaran et al. (2001). The ARDL bounds testing approach
allows for testing the presence of cointegration even in the presence of I (0) and
I (1) variables, while the traditional methods, for example, Johannsen’s method,
require the variables to be of order I (1). Furthermore, the ARDL model is also
free from the endogeneity issues arising from using the lags of the dependent

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Economic Change and Restructuring (2022) 55:1229–1248 1239

variable as instruments. We estimate Eq. 1 to check for cointegration among the

variables under the study.
n n n
∑ ∑ ∑
ΔYt = 𝛽0 + 𝛽i ΔYt−i + 𝛾j ΔX1t−j + ⋯ + 𝛿k ΔXnt−k + 𝜃0 Yt−1 + 𝜃1 X1t−1 + ⋯ + 𝜃n Xnt−1 + 𝜀t
i=1 j=1 k=1
(1)
Yt denotes the dependent variable in the above equations, which is remittances to
India (rem), and Xt represents a list of independent variables. The set of explanatory
variables includes nominal exchange rate of rupee vis-à-vis US dollar (ner), global
average oil price (oil), the interest rate premium (ird), home country’s gross domes-
tic product (gdp), host country GDP (usg), inflation differential (inf), and stock
market differential (smd). The choice of variables is purely based on the extensive
review of the literature.
We test for the null hypothesis of no-cointegration or the absence of long-run
relationship, which is represented as 𝜃0 = 𝛾j = 0 while the alternative hypothesis
tests for 𝜃0 ≠ 𝛾j ≠ 0 . The F-test associated with the hypothesis is non-standard,
and the null hypothesis can be rejected if the calculated F-statistic is higher than
the upper bound critical value. The null hypothesis cannot be rejected if the F-sta-
tistic is lower than the lower bound value. At the same time, the test is inconclu-
sive in the event of F-statistic lying between the lower and upper bound values.
Once cointegration among the variables is established, we estimate the error cor-
rection as given in Eq. 2.
n n n
∑ ∑ ∑
ΔYt = 𝛽0 + 𝛽i ΔYt−i + 𝛾j ΔX1t−j + ⋯ + 𝛿k ΔXnt−k + 𝜃Zt−1 + 𝜀t (2)
i=1 j=1 k=1

where Zt−1 = Yt−1 − 𝛼0 − 𝛼1 X1t−1 ⋯ − 𝛼n Xnt−1 .

( )
The above form of the equation is then used to estimate the long-run
multipliers.

5 Empirical results and discussion

5.1 Stationarity tests

Although the ARDL model does not require pre-testing for the presence of unit
roots, unlike traditional models, it is necessary to ensure that none of the vari-
ables is integrated of order two [I (2)]. To this end, we use three popular tests
viz. Dicky-Fuller GLS (DF-GLS),4 Philips-Peron (PP), and Kwiatkowski-Phil-
lips-Schmidt-Shin (KPSS) to determine the order of integration of the variables.
Both DF-GLS and PP tests assume a null hypothesis of the presence of unit roots
(underlying series is non-stationary), while the KPSS tests assume a null hypoth-
esis of stationarity. Table 5 reports the results of the tests.
The critical values for unit root tests (DFGLS, PP, and KPSS):

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1240 Economic Change and Restructuring (2022) 55:1229–1248

Table 5  Stationarity tests (ADF, PP, and KPSS). Source: Authors’ estimation
Variable DFGLS PP KPSS Conclusion
Level 1st dif Level 1st dif Level 1st dif

rem − 1.59 − 5.00*** − 3.08 − 16.58*** 0.39*** 0.06 I (1)

gdp − 1.63 − 3.62*** − 2.66 − 9.64*** 0.23*** 0.12* I (1)
oil − 1.90 − 5.04*** − 1.71 − 7.37*** 0.43*** 0.06 I (1)
ner − 1.52 − 3.91*** − 1.91 − 7.21*** 0.35*** 0.08 I (1)
usg − 1.41 − 3.50** − 2.61 − 6.68*** 0.35*** 0.17** I (1)
ird − 2.05 − 1.40 − 3.06 − 12.02*** 0.20** 0.11 I (1)
inf -1.94** − 5.11*** − 3.07** − 8.72*** 0.18** 0.04 I (0)
smd − 2.76*** − 2.16** − 7.21*** − 15.31*** 0.24*** 0.04 I (0)

The asterisk signs ***, **, * represent level of significance at 1%, 5% and 10%, respectively

Significance level DFGLS PP KPSS

Intercept Trend Intercept Trend

1% − 2.59 − 3.58 − 3.501 − 4.058 0.216

5% − 1.94 − 3.03 − 2.892 − 3.458 0.146
10% − 1.62 − 2.74 − 2.583 − 3.154 0.119

The stationarity test results indicate that all variables except inflation and stock
market differential are non-stationary at levels or I (1), which is expected. The sta-
tionarity tests thus warrant that we employ the ARDL model as the variables are a
mix of the I (0) and I (1) series.

5.2 ARDL bounds testing for cointegration

Having ensured none of the variables is integrated of order two, which is a pre-req-
uisite for the ARDL model, we estimate Eq. 1 and test for the presence of cointe-
gration or long-run relationship using the bounds testing approach. We estimate an
ARDL model of the form (1,0,0,0,1,1,1,0), and the lag selection is based on AIC
criterion as ARDL models are sensitive to lag length to avoid endogeneity issues.
We also use critical values provided by Kripfganz and Schneider (2018) as the criti-
cal values obtained are finite-sample and asymptotical as compared to the relative
asymptotic critical values provided by Pesaran et al. (2001) and Narayan (2005).
The results of bounds testing are reported in Table 6.
The critical values of bounds test.

Tests 10% 5% 1%
I (0) I (1) I (0) I (1) I (0) I (1)

F-test 2.101 3.282 2.442 3.723 3.199 4.682

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Economic Change and Restructuring (2022) 55:1229–1248 1241

Table 6  ARDL bounds test for cointegration. Source: Authors’ estimation

Models Lag selection F-stat t-stat Cointegration

rem = f (ner, gdp, oil, usg, ird, inf, smd) (1,0,0,0,1,1,1,0) 6.54*** 6.89*** Yes

The asterisks (***) denote statistical significance at 1%

Tests 10% 5% 1%
I (0) I (1) I (0) I (1) I (0) I (1)
t-test − 2.535 − 4.206 − 2.855 − 4.580 − 3.487 − 5.301

Source: Kripfganz and Schneider (2018).

Table 6 delineates the result of the ARDL bound test for cointegration. It can be
observed from the results that the F-statistic is clearly above the upper bound value
of I (1) at all levels of significance. It indicates the rejection of the null hypothesis
of no-cointegration. We conclude the presence of cointegration or long-run relation-
ship among the variables.

5.3 Long‑run and short‑run dynamics

Once we establish cointegration between the variables, we estimate Eq. 2 to derive

the long-run and short-run coefficients of the estimated model. Given the validity
and reliability of the model, we discuss the short-run and the long-run relationship
between remittances and their macroeconomic determinants.
Panel A of Table 7 reports the short-run dynamics of remittances with other vari-
ables. The estimated lagged error correction term (ect) is negative and highly signif-
icant at 0.1 percent. It confirms the existence of a substantial correction mechanism
in the case of remittances whenever deviations from the long-run equilibrium occur.
The speed of adjustment is relatively high, implying that 73 percent of the deviation
dissipates within the following quarter. Therefore, the remittance-receiving house-
holds may find the fastest recovery from the disequilibrium on their regular income
caused by macroeconomic shocks.
None of the variables is statistically significant in the short-run. However, many
macroeconomic variables have a long-run association with remittances (see Panel
B). The nominal exchange rate coefficient is highly significant, with a value of
− 0.68. That means a one percent change in the exchange rate leads to a − 0.68 per-
cent reduction in remittances to India. This finding suggests substitution effect in
remittance sending behaviour and agrees with the findings of Ojede et al. (2019),
Akçay and Karasoy (2019), and Abbas (2020).
The proxy variables for host country economic conditions such as oil price and
US GDP provide exciting insights. The oil price is positive and highly significant in
the long-run, with a coefficient value of 0.28. It concludes a 0.28 percent increase
in remittances to India for a corresponding one percent increase in oil prices. This
result is consistent with the earlier findings of Akçay and Karasoy (2019). However,

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1242 Economic Change and Restructuring (2022) 55:1229–1248

Table 7  Estimated short-run Variables Coefficients

and long-run coefficients of
ARDL model. Source: Authors’ A. Short-run coefficients
estimation
ect − 0.73***
(− 6.89)
D(usg) 0.06
(0.03)
D(ird) − 0.02
(− 0.83)
D(inf) − 0.01
(− 0.57)
con − 5.07
(− 1.10)
B. Long-run coefficients
ner − 0.68*
(− 1.94)
gdp 1.50***
(5.70)
oil 0.28***
(3.57)
usg − 0.42
(− 0.45)
ird 0.02
(1.33)
inf 0.01
(1.28)
smd 0.33
(1.38)
C. Diagnostic tests
R-squared 0.43
Adj.R-squared 0.35
AIC − 107.01
F-statistic 5.52***
Ljung-Box autocorrelation test 1.17
Jarque–Bera normality test 12.78
ARCH LM-test 28.76
Ramsey RESET test 2.79***
CUSUM test Stable

The t-statistic is given in parenthesis; Asterisk sign(s) ‘*’, ‘**’ and

‘***’ denote the significance at 5%, 1% and 0.1% levels

the US GDP is not significant in the short-run or long-run, aligning with Mughal
and Ahmed (2014). These results contradict that of Gupta (2006), who argues that
remittances to India are influenced by the benign state of the US economy while not
affected by the oil price movements.

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Economic Change and Restructuring (2022) 55:1229–1248 1243

More than half of the Indian immigrant population is in GCC countries, primar-
ily oil-producing economies (Noushad et al. 2020). Moreover, UAE is the primary
source of remittances to India, followed by the USA and Saudi Arabia (Pandikasala
et al. 2020). We should also notice that the emigrants to Gulf nations are mainly
low-skilled workers, while most migrant workers to the USA are relatively skilled
(Noushad et al. 2020). Therefore, the result implies that the Indian migrants (mostly
in gulf countries) are more vulnerable to the oil price shocks. At the same time,
migrant employees in the USA are not much exposed to the host country’s economic
shocks.
Moreover, the insignificant relative inflation shows that the inflationary pressure
in both host and home countries does not impact remittances. We also find a posi-
tive impact of domestic GDP over remittances, contradicting Mughal and Ahmed
(2014). The elasticity of remittances to the domestic GDP is 1.5 percent, significant
at the 0.1 percent level. These results negate the general notion that remittances are
countercyclical and altruistic. Therefore, we prove that remittances are not backed
by pure altruism in the case of India. Further, a weak stock market and interest rate
differentials indicate indifference of remittances to the stock market returns and
interest rate premium.
Panel C reports the diagnostic test results of the ARDL model. The residuals of
the model satisfy all conditions, including normality, no autocorrelation, and no het-
eroscedasticity. The R-squared and adjusted R-squared values are also reasonable
with a significant F-statistic, a point towards the overall significance of the model.
Finally, the stability of the model parameters is also tested with the cumulative sum
of recursive residuals (CUSUM) test,5 proposed by Pesaran and Pesaran (1997).
Furthermore, this indicates that the model parameters are stable. In Fig. 2, the curve
remained between the two critical limits and confirms the stability of the model
parameters.

6 Conclusions

The significant role of remittances in the development process of LMICs is broadly

recognised in the present literature. Thus, the economic determinants of remit-
tances are also widely explored by many cross-country and country-specific stud-
ies. However, less attention was given to check the association of remittances with

Fig. 2  CUSUM of recursive

residuals of the model. Source:
Authors’ estimation

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1244 Economic Change and Restructuring (2022) 55:1229–1248

macroeconomic conditions in the Indian context. This study attempts to bridge this
gap by adopting an ARDL approach to cointegration to find India’s macroeconomic
determinants of remittances. We use quarterly data spanning from 1996 to 2019
for estimation, while the earlier studies were mainly based on the annual data. We
incorporate the major host country and home country variables in the model. The
study succeeds in finding the significant macroeconomic variables that influence
remittances, including nominal exchange rate, oil price, and domestic output. Each
of these has a distinct and decisive impact on the remittance inflow. All the variables
under consideration have only a long-run impact on remittances to India.
The higher error correction term in the ARDL model signifies that any deviations
from the long-run equilibrium are corrected by around 73 percent in the next quar-
ter. Therefore, downturns in remittances due to the macroeconomic shocks may not
affect the receiving households longer. The depreciation of the Indian rupee results
in a reduction in remittance inflows and points out remittances’ substitution effect
behaviour. Therefore, it rejects the wealth effect when migrants find the opportunity
to take advantage of depreciation by sending more money.
Following the recent studies, we find that a rise in oil prices increases remittances
to India. Since a larger share of migrants from India is in GCC countries, the oil
price rise can increase their ability to send more money home. As another proxy for
the state of the host country’s economy, the US GDP does not impact remittances.
We suppose that the low-skilled migrants of the Gulf countries are more exposed to
the host country economic fluctuations than the skilled migrants in countries like the
USA.
Most importantly, the domestic output has a strong positive impact on remit-
tance inflows. Thus, our study finds that, in contradiction to the common convic-
tion, remittances are not countercyclical. The remittances are unresponsive to the
inflation differential. Therefore, we negate the general notion of the pure altruistic
motive of remittances, which is not evident in the Indian macroeconomic context.
In general, we supposedly assume a weak presence of investment motives for remit-
tance to India. However, we do not have corroborating evidence, as the stock market
return and interest rate premium are insignificant.
Therefore, appropriate government policies in home countries that offer better
investment opportunities for emigrants can ensure the uninterrupted inflow of remit-
tances. We also emphasise the vulnerability of low-skilled migrants who are exposed
to economic shocks in host countries. It is more important to note as the Covid-19
has equally shaken all the migrant destinations. The macroeconomic instabilities
caused by the pandemic would put the life of migrants at peril also in the post-Covid
era. Further enquiry is required into the prospects of remittances in this scenario.
Notwithstanding all these concerns, remittances offer a stable flow of income to the
dependent households as it quickly gets over the disequilibrium caused by the mac-
roeconomic disturbances.
The recorded migrants’ transfers to India are categorised as “private transfers”
under the current account of the BoP. However, NRI (Non-resident Indians) deposits
in India are a subset of the capital account. Private transfers are one-sided trans-
actions that do not have any quid pro quo. It includes direct inward remittances
for household maintenance, personal gifts/donations to charitable or religious

13
Economic Change and Restructuring (2022) 55:1229–1248 1245

institutions, gold and silver brought through passenger baggage, repatriation of bank
savings, and local withdrawals from Non-Resident Rupee Accounts (RBI, 2010).
The paper titled “Motivation to Remit: Evidence from Botswana” introduced the
‘motives to remit’ which are the driving forces of remittances, through a household
level study in Botswana.
Remittances are altruistic and countercyclical (Chami et al. 2008; Frankel 2011;
Bettin et al. 2017). In contrast, it can be procyclical and positively correlated with
income (Sayan 2006; Giuliano and Ruiz-Arranz 2009). Moreover, it can also be
driven by a mix of both motives (Lueth and Ruiz-Arranz 2006).
Its a modified Dickey-Fuller t-test proposed by Elliott et al. (1996). This test is
known for its greater power than the previous versions of the augmented Dickey-
Fuller (ADF) test.
The Cumulative Sum of Squares (CUSUMQ) test is complementary to the
CUSUM test to the extent the CUSUM tests are not powerful enough to reject the
null hypothesis of no structural change in small samples. Since we have a decent
sample size for estimation, we proceed with the CUSUM test only.

7 End Notes
1
The recorded migrants’ transfers to India are categorised as “private transfers”
under the current account of the BoP. However, NRI (Non-resident Indians) deposits
in India are a subset of the capital account. Private transfers are one-sided transac-
tions that do not have any quid pro quo. It includes direct inward remittances for
household maintenance, personal gifts/ donations to charitable or religious institu-
tions, gold and silver brought through passenger baggage, repatriation of bank sav-
ings, and local withdrawals from Non-Resident Rupee Accounts (RBI 2010).
2
The paper titled “Motivation to Remit: Evidence from Botswana” introduced the
‘motives to remit’ which are the driving forces of remittances, through a household
level study in Botswana.
3
Remittances are altruistic and countercyclical (Chami et al. 2008; Frankel 2011;
Bettin et al. 2017). In contrast, it can be procyclical and positively correlated with
income (Sayan 2006; Giuliano and Ruiz-Arranz 2009). Moreover, it can also be
driven by a mix of both motives (Lueth and Ruiz-Arranz 2006).
4
Its a modified Dickey-Fuller t-test proposed by Elliott et al. (1996). This test is
known for its greater power than the previous versions of the augmented Dickey-
Fuller (ADF) test.
5
The Cumulative Sum of Squares (CUSUMQ) test is complementary to the
CUSUM test to the extent the CUSUM tests are not powerful enough to reject the
null hypothesis of no structural change in small samples. Since we have a decent
sample size for estimation, we proceed with the CUSUM test only.

Declarations

Conflict of interest The authors declare that they have no conflict of interest.

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1246 Economic Change and Restructuring (2022) 55:1229–1248

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Authors and Affiliations

P. Jijin1 · Alok Kumar Mishra2 · M. Nithin3

P. Jijin
[email protected]
M. Nithin
[email protected]
1
Madras Institute of Development Studies (MIDS), 79, II Main Road, Gandhi Nagar, Adyar,
Chennai 600 020, India
2
School of Economics, University of Hyderabad, Prof. C.R. Rao Road, Gachibowli,
Hyderabad 500046, India
3
Department of Humanities and Social Sciences, Indian Institute of Technology Kharagpur,
Kharagpur, India

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