Effect of Foreign Remittances on Sub-national Economic Growth: a state-specific analysis of Kerala

Foreign remittances have emerged as a vital and sustained source of external finance for developing economies, and Kerala represents one of the most significant subnational examples of remittance-driven development in India. Over the last five decades, large-scale emigration from the state, particularly to the Gulf Cooperation Council (GCC) countries has profoundly influenced economic growth of Kerala and social landscape. While remittances have played a crucial role in enhancing household welfare, financing essential consumption and improving living standards, their long-run impact on economic growth remains an area requiring deeper empirical investigation. Against this background, the present study examines the long-run relationship between foreign remittances and Kerala’s economic growth using annual time-series data from 1972 to 2023. Employing the Johansen cointegration framework and Error Correction Mechanism (ECM), the study finds evidence of a stable long-run equilibrium relationship between Net State Domestic Product (NSDP) and inward remittances. Though short-run adjustments were found to be statistically insignificant, theexistence of cointegration indicates that remittance inflows have a meaningful long-term association with Kerala’s growth trajectory. Trend analysis further shows a consistent rise in remittances at an average annual rate of 13 per cent, though their share in NSDP has displayed cyclical fluctuations in response to both global migration patterns and domestic economic conditions. The findings underscore the need for policy interventions aimed at channelising remittance income into productive avenues, strengthening financial inclusion and enhancing institutional mechanisms to ensure that remittances contribute to sustainable and broad-based economic development in Kerala.