Investigating the Relationship between Remittances, Institutional Quality, and Labour Supply in India

Abstract

India is one of the world’s top remittance recipient countries. However, there is an ongoing debate on whether workers’ remittances serve as a ‘political curse or cure.’ Additionally, remittances influence the domestic labour supply left behind by migrant workers. Our study aims to utilise the ARDL bounds test and Granger causality to examine the long-run and short-run relationship between remittances, institutional quality, and labour supply from 1990 to 2018 in India. The results from the ARDL bounds test indicate a cointegrating relationship when institutional quality is treated as the dependent variable. The Granger causality test further supports unidirectional causality from remittances and labour supply to institutional quality in India. In the short run, findings indicate bidirectional causality between remittances and labour supply. The study contributes to the literature by constructing a composite index for a more accurate measure of institutional quality. Furthermore, the study includes relevant break dates as dummy variables, as it allows for country-specific structural breaks to be considered. Contrary to prior studies, we find no evidence of a public moral hazard problem created by India’s remittances. We argue that inbound remittances improve the well-being of recipients and pressure policymakers for more political accountability and better governance.