Context: As per World Bank’s latest Migration and Development Brief, India is expected to post a growth of just 0.2% in remittance inflows in 2023. It had registered a growth of more than 24% to reach a record-high $111 billion in remittances in 2022.
What are Remittances?
- When migrants send home part of their earnings in the form of either cash or goods to support their families, these transfers are known as workers’ or migrant remittances.
- Remittance forms a part of the transfer payment category in the current account of the Balance of Payments (BoP) records in an economy.
- BoP is the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year.
- There are two main accounts in the BoP — the current account and the capital account.
- Current Account is the record of trade in goods and services and transfer payments.
- Trade in goods includes exports and imports of goods.
- Trade in services includes factor income and non-factor income transactions.
- Transfer payments are the receipts which the residents of a country get for ‘free’, without having to provide any goods or services in return. They consist of gifts, remittances and grants. They could be given by the government or by private citizens living abroad.
Trends in Remittance Flows
- Country-wise Rankings: The top recipient countries for remittances in 2022 were:
- Share of Remittance in GDP: It is an indicator of the significance of the remittances for funding current account and fiscal shortfalls, remittance inflows represented very large shares of GDP in countries such as:
- Intra-Regional Variation: Although remittances amounted to only 4% of South Asia’s GDP in 2022, the variation across countries was large. In Nepal, remittances stood at 23.1% of GDP in 2022, compared with 7.9% in Pakistan, 5.1% in Sri Lanka, and 4.7% in Bangladesh. In India, the largest global recipient, remittances represented only 3.3% of GDP in 2022.
- Structural Shift in Country-wise Share in India’s Inward Remittances: There has been a gradual structural shift in Indian migrants’ key destinations from largely low-skilled, informal employment in the Gulf Cooperation Council (GCC) countries to a dominant share of high-skilled jobs in high-income countries such as the United States, the United Kingdom, and East Asia. As per RBI, the share of remittances from the US, UK and Singapore increased to 36% of the total in 2020-21, up from 26% in 2016-17. Over the same period, the share of Middle East countries – Saudi Arabia, United Arab Emirates, Kuwait, Oman, and Qatar – dropped from 54% to 28%.
- State-wise Share of Remittances Receipts: The share of traditional remittance recipient states such as Kerala and Karnataka, which dominated the West Asian region, fell sharply in 2020-21 compared to 2016-17. Maharashtra emerged as the top recipient state in 2020-21, surpassing Kerala, the top recipient in 2016-17.
Importance of Remittances for an Economy
- Covers Deficit in Goods Trade: Increased remittance flows has enabled the country to withstand even fairly serious deficits in trade. Till the mid-1990s, the net income on services and remittances was around 1-2% of GDP, which now has reached the level of 4-6% of GDP. If it had not been for the offsetting surplus on services and remittances, India’s current account would have been far larger.
- Evenly Distributed as compared to Capital Flows: Remittances are also more evenly distributed among developing economies than capital flows, including foreign direct investment. Remittances are especially important for low-income countries and account for nearly 4 percent of their GDP, compared with about 1.5 percent of GDP for middle-income countries.
- More Stable than Capital Flows: Remittance flows tend to be more stable than capital flows, and they tend to be countercyclical—increasing during economic downturns or after a natural disaster when private capital flows tend to decrease. In countries affected by political conflict, they are often an economic lifeline to the poor.
- Promotes Domestic Consumption: In poorer households, remittances may buy basic consumption goods, housing, and children’s education and health care. In richer households, they may provide capital for small businesses and entrepreneurial activities.
- Help Deal with Balance of Payment Crisis: They help pay for imports and external debt service; in some countries, banks have raised overseas financing using future remittances as collateral.
- Strengthens Socio-economic Resilience: They alleviate poverty, improve nutritional outcomes, and are associated with increased birth weight and higher school enrolment rates for children in disadvantaged households. Studies show that remittances help recipient households to build resilience, for example through financing better housing and to cope with the losses in the aftermath of disasters.
- Improves Standards of Living: They provide essential support to households, helping them meet their financial needs and improve their living standards. The impact of remittances extends beyond the economic aspect, as they contribute to social welfare and poverty reduction.
- Provides Foreign Exchanges: Remittances play a crucial role in providing foreign exchange to countries, which contributes to their economic stability and growth.
- Economic Slowdown in West & Middle East: Higher inflation in the United States accompanied by an economic slowdown will soften remittance flows to India, with growth easing to 4 percent. The drop in oil prices from $98 to $85 per barrel (2002–03) combined with the decline in economic growth in the West Asian countries will reinforce downward pressure on remittance flows to all South Asian countries.
- High Transaction Costs: Transaction costs rarely affect large remittances, but for smaller remittances—under $200, say, which is often typical for poor migrants—fees typically average 7 percent, and can be as high as 15–20 percent in smaller migration corridors.
- Encourages Labour Emigration: Countries that receive remittances from migrants incur costs if the emigrating workers are highly skilled or if their departure creates labour shortages.
- Higher Inflows Makes Domestic Economy Less Competitive: Also, if remittances are large, the recipient country could face real exchange rate appreciation that may make its economy less competitive internationally.
- May Lead to Moral Hazard: Remittances can undercut recipients’ incentives to work and thus slow economic growth.
- Negative Human Costs: Migrants sometimes make significant sacrifices – including separation from family – and incur risks to find work in another country. And they may have to work extremely hard to save enough to send remittances.
- In the past, the actions of Indians as individuals have made the country’s current account more stable, especially during a crisis, when other sources of flows, such as those from foreign investors have dried up.
- The World Bank’s latest Migration and Development Brief provides a shifting picture over the years of how the behaviour of individuals or households have affected India’s balance of payments with the rest of the world. As this behaviour changes, it can introduce new uncertainties into India’s transactions with the rest of the world.