Remittances to India: risks, opportunities

The 2018 edition of the Migration and Development Brief was released recently by the World Bank. According to the report, India is ranked No. 1 in terms of remittances of money back to home, with remittances touching nearly $69 billion in 2017, closely followed by China ($64 billion).

Remittance flows improved across the board for different regions in 2017 with Europe and Central Asia witnessing the highest level of growth (20.9%) and South Asia witnessing the lowest (with a moderate 5.8%). The Brief has also been the harbinger of economic recovery in the European Union, the Russian Federation and the United States. The rebound in remittances for all regions in 2017 was attributed to the revival of economic activities in these advanced nations and steady rise in oil prices in the Gulf region.

The overall remittance flows to Low and Middle Income (LMIs) countries (which includes India as well) increased by 8.5% in 2017 touching $466 billion and the global remittance flows rose by 7% to $613 billion. The outlook for 2018 remains optimistic with remittances projected to grow 4.1% to $485 billion for LMI countries.

The remittance flows to India dropped by close to $2 billion between 2014 and 2015 (from $70.4 billion in 2014 to $68.9 billion in 2015) and it further fell in 2016 (to $62.7 billion), the main reasons being depressed global economic activity, hindered economic growth in advanced nations and stagnation in oil prices.

The good news is that remittance flows have reversed the previous year’s dip from a decline of 8.9% in 2016 to a sharp growth of 9.9% in 2017. However, the report also highlights certain long-term risks associated with restrictions on migrants, which may adversely affect remittance flows to India.

Nearly 55% of total remittances into India are sent from the West Asian countries, while 15% are from the US and around 11% from Europe. With escalation of anti-immigration sentiments and restrictive migration policies adopted across the US, Europe and Gulf Cooperation Council (GCC), the euphoria associated with sudden rise in remittances could be short-lived.

The adoption of the nationalisation scheme by Saudi Arabia requiring companies to maintain a certain level of Saudi nationals in their workforce (commonly known as Saudiisation or Nitaqat) would have an adverse impact on remittances. Also, overall cuts in subsidies and the imposition of new taxes in GCC countries would add on to the already existing woes of migrants.

Introduction of a 5% value added tax (VAT) by Saudi Arabia and the United Arab Emirates would increase the cost of living for foreign workers and leave less income for remitting. Kuwait’s approval of a draft law to tax remittances of expatriate workers and implementation of dependent’s tax by Saudi Arabia (tax on the expatriate’s dependent family members) suggest that the growth in remittances on account of increased economic activity is temporary.

In the case of the US and UK, remittances could be affected due to restrictions imposed on aspiring migrants by way of increased scrutiny, higher visa fees, and reduction in the overall rate of visa approvals. It is evident that the spurt in nationalist tendencies observed across remittance-sending countries comes forth as a major impediment and the biggest risk for sustained growth of remittances.

External stability

Remittances have played a vital role in maintaining external stability. They have been a stable source of external inflows contributing to India’s foreign exchange reserves and providing a buffer during spikes in crude oil prices. Presently, the rise in crude oil prices, which on one hand has led to increased remittances from GCC countries, has on the other hand contributed to widening of the current account deficit (CAD) by increasing India’s import bill.

With a tilt towards domestic labour and restrictions imposed upon immigrant workers in GCC countries, an increase in oil prices may not culminate into higher remittances to offset the increased deficit in the future.

One way forward is to mainstream the remittances that flow in from informal channels by reducing the cost to remit. Though South Asia had the lowest average remittance cost of 5.2% as compared to other regions, it is still well above the Sustainable Development Goal (SDG) target of 3%.

India suffers from some of the most expensive remittance corridors with costs of over 10% from countries like South Africa, Japan and Thailand. It would be in India’s best interest to introduce efficient technologies in remittance services to make it easier and cheaper to remit home.

Diversifying migration to other regions such Africa and East Asia must also be considered. For now, we can rejoice the fact that the remittances have bounced back and are expected to grow in the coming year, but India must be cautious that a reversal may not be too distant.

(The writer is a research scholar with the Institute for Social and Economic Change, Bengaluru)