Threshold Effects of Financial Development on the Inequality Impact of Remittances: Evidence from India

Abstract

This paper investigates the effect of remittance receipts on income inequality in India for the time span 1990–2024 with particular focus on the moderating effect of financial development in attaining inclusive growth. Employing the Threshold Regression Method of Hansen (2000), the empirical estimation considers the nonlinearity in the remittance–inequality relationship, and financial development is considered the threshold variable. Empirical findings demonstrate that remittances help to reduce income inequality only if financial development exceeds some threshold of about 45% of GDP. On the other hand, below this threshold, remittance receipts have limited or no equalizing impact and can even entrench inequality due to limited access to formal financial channels. These results highlight that an inclusive and well-functioning financial system must be present to transform remittances into a consumption smoothening instrument rather than an engine of sustainable and equitable economic growth. Financial depth and inclusion are thereby enhanced to supplement the redistributive and developmental impacts of remittance inflows to India.