Capital inflow and financial status of the Indian economy

Abstract

Foreign capital tends to be erratic in nature as it flows more during favourable times, in contrast to the times of crises, when they tend to flow less. This situation can be explained well with the example of the inflow of Official Development Assistance (ODA) and Foreign Direct Investment (FDI) in recent years in India. As compared to the ODA and FDI, capital inflows in terms of remittances were relatively stable, for example, remittance inflows in developing countries hiked during 1998–2001 but during the same period, a decline in FDI was noticed during the East Asian crisis. Along with FDI and ODA, remittances also play a very important role in the development of finance but their mechanism is quite different from the other two. Against this background, this chapter tries to study the effects of remittances on the financial status of the Indian economy using appropriate time series econometric techniques involving the ARDL model. The study obtains a significant long-run relationship between remittance and financial development. The long-run estimation of the ARDL model suggests that the inflows of remittances have a positive and significant impact on the financial development of the country