Does Remittance and Human Capital Formation Affect Financial Development? A Comparative Analysis Between India and China

Abstract

This article examines the relationships between remittance and financial development (financial institutions and markets) in India and China on the availability of annual data from 1984 to 2018. Human capital formation is considered as a channel of remittances in financial development functions. Institutional quality, Economic globalization, foreign direct investment, economic growth, and government investment are included as a set of control variables in the financial development function. The results of the ARDL bounds test model indicate that remittance can positively impact financial development dynamics in both countries. While considering the human capital formation, higher levels of skilled human capital (secondary and tertiary enrolments) enhance financial development, but low-level human capital (primary enrolments) fails to do so. One contradiction found from the result is that remittance is negatively but significantly affecting financial institutions in India, and also detrimental to China's financial market. Oppositely, remittance positively impacts India’s financial market and China’s financial institutions. We find the varying impacts of control variables on financial development. The outcome of this paper stresses the necessity of a higher level of skilled human capital and improved institutional quality in both countries, which provides better utilization of remittances and other foreign and domestic financial flows.