‘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.

KEYWORDS:

• Remittance
• trade balance
• oil price
• Dutch disease
• India

JEL Classifications:

• F22
• F10
• C22

Acknowledgement

The authors extend their heartfelt gratitude to the Editor and the anonymous reviewers for their invaluable contributions, which have significantly enhanced the development of this manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Rising remittances, like any other massive capital inflow, can appreciate the real exchange rate of recipient countries, causing a resource allocation from the tradable to the non-tradable sector. This phenomenon is usually labelled as the ‘Dutch disease’ (Acosta, Lartey, and Mandelman 2009)

2 Sahoo, Babu, and Dash (2022a) show that there is direct relationship between fiscal deficit and current account deficit, and hence validating the twin deficit hypothesis in the context of India.

3 The break years are drawn from the results of Kim and Perron (2009) presented in Table 3.