India’s remittance lifeline

Subject: Economy

Section :External sector

Context: Remittances were a source of comfort for India’s BoP during the pandemic. But a shift in share of sources is worrisome.

Balance of payments data from the RBI

Balance of payments data from the RBI suggest that remittance inflows have been relatively strong through the pandemic. Having fallen by 3 per cent, from $76 billion in pre-pandemic year 2019-20 to $73 billion in 2020-21, these flows bounced back to touch $80 billion in 2021-22

However, according to figures recently released by the RBI, the pandemic did change the source countries from which these remittances originated.
Ever since the oil price increases of the 1970s set off a construction and business boom in the Gulf, those countries have been the destination for a migration trail of workers from India, varying from the unskilled to the semi- and highly skilled. These workers had to repatriate money to finance household consumption at home and transfer sums for any investments undertaken.
United States and the United Kingdom were temporary workers employed to provide software and business services on location, often sent by firms in India taking on offshored contracts to provide onsite support services. These workers too sent money home to support consumption needs and finance investments out of savings.
The share of the Gulf countries in private transfer inflows rose from 29.2 per cent in 2006-07 to 30.6 per cent in 2009-10 and 36.9 per cent in 2012-13. On the other hand, the North American share in these three years was 32.5 per cent, 29.7 per cent and 34.3 per cent, and the European share 17, 19.5 and 12.2 per cent

However, the most recent data relating to pandemic year 2020-21 suggests that the collapse in oil prices and trade volumes hugely affected remittances from the Gulf. In that year the share of the GCC nearly halved to just 28.6 per cent (from 53.5) whereas the share of the US edged up marginally to 23.4 per cent (from 22.9) and that of the UK more than doubled to 6.8 per cent.

The relative resilience of overall flows and those from the US and UK is possibly explained by the fact that in a crisis period when short-term migrants lose their jobs and return home, they make lump sum transfers of the savings held abroad.
The figures do suggest that remittances resulting from migration of the type characteristic of the GCC countries are far more volatile than those from the advanced economies. Given the importance of remittances for India’s balance of payments, this is a source of instability that needs to be taken account of.