Drop in remittances to have economic, social implications

Drop in remittances to have economic, social implications

Drop in remittances to have economic, social implications
India’s external fundamentals remain stable despite the Balance of Payment (BoP) turning negative in the third quarter of financial year 2017 (Q3 FY17 – October 2016 to December 2016). The US election, Fed rate hike, FCNR (foreign currency non-resident deposits) redemptions and demonetisation have led to large capital outflows in that quarter.

The net portfolio outflows at $11.3 billion was larger than that witnessed during the ‘Taper Tantrum’ of 2013 or the global financial crisis of 2008. Despite such large outflows, the overall capital account remained positive.

However, the portfolio flows have already recovered since the start of the calendar year. India’s current account deficit (CAD) is expected to widen to a still sustainable level of 1.7% of GDP in FY2017 from 0.5% in FY2016.

Among all these details on external factors, it is surprising that nobody is talking about the secular slowdown of remittance flows since 2015. Remittances are money that migrant workers send back to their home country.

According to a World Bank report, total remittances in 2016 by migrant workers from developing nations to their parent countries were a massive $442 b - three times the size of the total development global aid money. India has been the top recipient of remittance flows among developing economies since 2008. Remittances to India declined by 2.1% in 2015, to $68.9 b - marking the first decline since 2009.

The World Bank estimates it to decline by another 5% in 2016. The latest BoP data for Q3 FY2017 quarter shows that remittances slowed to $13.9 b, the levels last seen in 2011 from the peak of $16 b per quarter till September 2015. Despite this, India will retain its topmost place by a small margin ahead of China accounting for about 14% of total remittance flows to the developing countries.

Based on an RBI Survey, the sources of remittances in India broadly reveal the migration pattern, skill content of the migrants and the earning levels.  Prior to the IT and BPO revolution of 1999, larger share of India’s remittance earnings was from unskilled and semi-skilled workers in Gulf countries as most of them had temporary employment and remitted their earnings home while migrants to the US, Canada and the UK had secure jobs and came from families that needed less support.

From 1997 onwards, IT and software related short-term work assignments attracted Indians across the globe contributing to an increase in the remittances from North America. These two regions account for about 70% of India’s remittance flows.

World Bank reports that UAE, USA and Saudi Arabia are the top three countries sending remittances to India. Indian coastal state of Kerala receives about 40% of total remittance flows to India, followed by Punjab and Tamil Nadu with a share of around 12 to 13%. If Kerala was considered as a country, it would be the top remittance dependent economies in the world with remittances accounting for about 35% of State GDP.

Slowdown in remittances can have serious ramifications. Remittances are important and stable source of foreign earnings for India. In FY 2015-16, remittances, at 3% of GDP and 18% of reserves, covered nearly 48% of India’s merchandise trade deficit. It was twice the amount of FDI inflows in that year.

Interestingly, remittances have been almost 80% of the earnings through telecomm, software services exports. Without remittances, India’s CAD would have swelled to unsustainable 4% of GDP from 1% in FY16.

Second, unlike capital flows that follow the economic cycle, remittances tend to be less volatile and countercyclical. During the global financial crises in FY 2009-10, while FDI and portfolio investment contracted by 19% and 219% respectively, remittances grew by 16%.

According to World Bank’s Dilip Ratha, remittances, unlike private investment money, don’t flow back at the first sign of trouble in the country. Remittances also reach the recipients directly and need not go through official agencies or government like the aid money.

Third, remittances help improve Human Development Index (HDI) and increase per capita income of the population. It is seen that remittances played a role in placing Kerala at a high HDI rank, at par with that of developed nations, despite considerable unemployment and a negligible industrial base. Moreover, the Crisil prosperity index puts Kerala in the second position, next to Punjab.

Oil prices

Interestingly, remittances and oil prices are positively related. Being a large oil importer, India benefited massively as oil prices declined sharply - our oil import bills halved, inflation softened and fiscal deficit narrowed with lower subsidy bill. On the other hand, lower oil prices hurt economic activities and employment in the Gulf countries.

Indian immigrants in those countries lost jobs and had to return home. The labour market ‘nationalisation’ policies in Saudi Arabia also impacted Indian workers. As a result, remittances from the Gulf dwindled. Kerala, with large part of its immigrant population in the Gulf, is worst hit by this slowdown.

There is a need to put in place the infrastructure required to attract these flows by including all the post offices in the electronic clearing and settlement systems. Other measures like reducing migration costs, recruitment costs for low-skilled temporary workers, improving banking penetration in rural India, increasing financial literacy and using innovative technology for cross-border payment transfer are necessary for lowering cost of remittances.

Indian diaspora is one of its biggest strengths which has always responded generously at times of national need. The World Bank had recommended floating diaspora bonds in order to tap into their large savings. These bonds can be used to fund many of the government’s campaigns like low cost housings, rural electrification etc. With government facing fiscal constraints, this will help increase public investment.

Remittances have both economic and social implications. It is time for policy makers to understand the direct and indirect impact of remittances on wealth creation, inequality-poverty reduction and human development.

(The writer is a research scholar at IIFT and adviser at Policy Monks)