The Impact of Remittances Sent to India (1980-2021) on Economic Growth and Capital Formation: An Econometric Case Study

Abstract

The present study analyzes the impact of remittances on economic growth in India from 1980 to 2021, using annual time series data sourced from World Development Indicators, World Bank. This study utilizes the Johansen co-integration test, Vector Error Correction Model (VECM) and Granger Causality test to investigate the long-term equilibrium linkages and short-run dynamics among gross domestic product, gross capital formation and remittances. The findings indicate the existence of long-run relationship, suggesting that capital stock has a positive and significant impact on growth, whereas remittances contribute positively to economic performance, their impact is relatively modest, because a substantial portion of remitted funds is directed toward household consumption and non-productive use rather than investment in productive sectors. In the short-run, remittance and capital stock influence growth with an 18% rate of adjustment towards equilibrium. Granger causality test indicates a unidirectional causal relation from remittances to economic growth and from remittance to capital stock. The findings suggest that while remittances may not directly stimulate economic growth, they indirectly facilitate capital accumulation, human capital enhancement and household spending, therefore adding to India’s economic performance. The study emphasizes the necessity for policies that direct remittance inflows towards productive investments to optimize their developmental potential.