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Dynamic Multiplier Effects of Foreign Remittances
India continues to be the largest recipient of remittances across the world, with a tremendous growth in private unrequited transfers from just ₹12 billion in 1990–91 to about ₹1,009 billion in 2015–16. Emphasising this component of remittances that India has witnessed during the post-liberalisation period, the article investigates the demand-side macroeconomic effects of the flow of private transfers on key variables such as consumption, investment, imports, and income in India during the post-reform period of 1996–2014.
This article was developed as part of the research carried out under the Reserve Bank of India (RBI) Scholarship Scheme for Faculty Members during 2015–16. Views expressed in the paper are solely of the author and not of the RBI.
Remittances by international migrants to their countries of origin constitute one of the largest sources of external finance for developing countries. As highlighted in the latest Migration and Development Brief by World Bank (2019), India continues to be the largest recipient of remittances (in absolute terms) across the world. According to the statistics published by the Reserve Bank of India (RBI), there has been tremendous growth in private unrequited transfers to India in the post-liberalisation period, from ₹12 billion (1990–91) to about ₹1,009 billion (2015–16). At present, these transfers account for nearly 3.5% of India’s gross domestic product (GDP), up from 0.8% in 1991. They have offset India’s merchandise trade deficit to a large extent, ensuring that current account deficits remained modest through the 1990s. At the same time, remittances are among the least volatile of inflows, in both the current and capital accounts of India’s balance of payments (BoP).
In recent years, remittances have come to be considered a stable source of development finance. They can be used for consumption, asset creation, small savings, and investment in sectors such as education, health, and small enterprises. In addition to providing financial resources to low-income households, remittances also influence macro-level activity, through direct effects on output growth. Additionally, through indirect multiplier effects arising as a result of household consumption and investment activity, they contribute to the GDP growth of the country.
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