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Troubling Signs

The fall in inward remittances to India is a matter of concern for various reasons.

Inward remittances by workers from developing countries have come down successively in 2015 and 2016. Whereas remittances to developing countries as a whole fell by 2.4% in 2016 after a decline of 1% in 2015, the fall was particularly steep at nearly 9% for India, the world’s largest remittance-receiving country. If this trend continues, it is bound to adversely impact not only the current account of the balance of payments but could potentially hurt particular states, notably Kerala, among others, which send out large numbers of migrants to work in countries in West Asia and elsewhere. The overall economic impact of inward remittances is mixed. However, even as the government continues to roll out the red carpet for private foreign investors, lower remittances coupled with stagnant flows of official development assistance (ODA)—as foreign aid is euphemistically called—will hardly be good for the country.

The estimates given are from a report titled “Migration and Remittances” published in April and prepared by the Global Knowledge Partnership on Migration and Development (KNOMAD), a multi-donor trust established and funded by the World Bank and government bodies in Germany, Sweden and Switzerland. The report points out that while remittance flows to developing countries fell after the 2008 global financial crisis, these bounced back within a year. Over the last two years, however, there has been a fall in remittances on account of a combination of circumstances, including low crude oil prices, weak economic growth in the countries of the Gulf Cooperation Council and Russia and fluctuations in exchange rates. The report states that the surveys conducted by it and by the International Labour Organization (ILO) show that recruitment costs paid by low-skilled workers to unscrupulous agents are extortionate, often as much as a year’s income, while transaction costs of sending funds to home countries remain high at an average of 7.5% of the amount remitted. In addition, there have been many reports of the miserable conditions under which construction workers from India are made to live in certain “prosperous” West Asian countries.

Remittances are considered to be countercyclical in the sense that such flows act as a buffer in the face of economic downturns by providing a stable source of foreign currency. According to the World Bank, total remittances have trebled over the last 15 years before declining over the last two years. At its peak in 2014, the largest recipients of remittances were India ($70 billion) followed by China ($64 billion). While remittances can boost certain kinds of economic activities (including construction of houses by recipient households), there are negative consequences as well, including a worsening of inequalities, reduction in labour supplies and skewing gender balances. Economists of multilateral financial institutions like the World Bank claim that those who receive remittances open bank accounts which, in turn, helps promote access to financial services. Scholars and researchers are critical of this view on the ground that remittances do not address the structural causes contributing to inadequate economic development and that the emphasis on finance as a means of promoting so-called “self-help development” often lays a burden on the poor.

The overall picture of India’s external balance of payments is an uneven one. Exports have picked up in recent months after more than a year of decline. Comparing the Balance of Payments figures of the Reserve Bank of India for the April–December 2016 period with the corresponding period in the previous year, the current account deficit and the merchandise trade deficit have both narrowed. Net foreign direct investment has gone up as has net accretion to foreign currency reserves. While oil prices have been benign for three years, these may not remain that way. Net foreign portfolio investment flows have shrunk. The rising outflows of profits, interest and dividends and the slowdown in the growth of exports of computer software and information technology-enabled services are worrisome. Such exports are expected to continue to be constrained on account of rising protectionism in the United States (US). It is also uncertain whether there will be any significant growth of demand for India’s potential exports over the medium term in the US, Western Europe and Japan.

It is in this bigger context that the fall in remittances should be viewed. Remittances are indeed playing a growing role in the economies of many developing countries, including India, by contributing to the livelihoods of temporary migrant, semi-skilled workers. Another significant source of remittances has been Indian expatriates in North America, mainly software engineers. The recent curbs on H1B visas are expected to adversely affect this source of inward remittances, a significant part of which is used to purchase assets, including residential properties.

Overall, the fall in the flow of remittances is on account of factors beyond the control of the government but is nevertheless a matter of concern.

Updated On : 19th May, 2017

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