Has
unemployment or unsatisfactory employment at home proved
a boon rather than bane for India? That seemed to be
the message that came through when the World Bank reported
that in crisis year 2008 India had bettered its position
as the leading recipient of remittances, with a record
inflow of $52 billion. This was well ahead of the $40.6
billion that China, which stood second, received that
year. According to those estimates, remittances to India
had increased by more than a third from its $38.7 billion
level in 2007. Clearly, short term migration was not
just proving to be a temporary solution to the unemployment
problem at home, but was delivering a flow of foreign
exchange that could serve as a shock absorber in times
of crisis when foreign investors were holding back or
moving out, exports were slowing and domestic income
growth was sluggish.
The significance of these flows should not be underestimated.
Even in 2007, remittances into India amounted to 3.3
per cent of its GDP. In 2007-08, when the effects of
the global crisis were yet to be felt, India's balance
of payments statistics indicate that net private transfers
to the country consisting largely of remittances brought
in $41.7 billion, which was higher than the $40.3 billion
earned through the much-celebrated net exports of software
services and just marginally less than the $45 billion
that came in the form of both direct and portfolio investment.
In 2008-09, provisional figures indicate that net private
transfers stood at $44 billion and net software services
exports had risen to $47 billion, whereas net foreign
investment (direct and portfolio) had collapsed to just
$3.5 billion, largely because of the exit of portfolio
investors. Net portfolio inflows that stood at $29.6
billion in 2007-08 turned negative, and the net outflow
was around $14 billion.
The sources of remittances have indeed changed over
time. Immediately after the oil shocks of the 1970s,
the short-term migration trail was dominated by the
flow of masons, carpenters, and unskilled workers drawn
by the construction boom in West Asia. Migration to
other parts of the globe, especially its developed centres
like the United States and the United Kingdom, consisted
of permanent migrants, who retained most of their savings
in their countries of residence. Short-term migrants
often had their families at home to maintain and chose
to transfer their savings home, being attracted by the
higher interest rates and driven by the need to accumulate
their savings to support them when they return.
The transformation that has taken place in the sources
of remittances over the last decade and a half is that
while West Asia has remained an important source in
absolute terms, its share in total remittances has indeed
fallen substantially. According to a 2006 study by the
Reserve Bank of India, region-wise, North America accounted
for nearly 44 per cent of the total remittances to India,
followed by the Middle East (24 per cent) and Europe
(13 per cent). This shift in the sources of remittances
was a result of the impact that the software services
export boom had on the nature of Indian migration to
the United States and Europe. In the United States,
for example, the flow of software and IT services workers
required to provide onsite services to clients of Indian
firms under the HI B visa provision, increased substantially.
These workers, who were paid a full salary or a substantial
allowance while resident in the US, saved and transferred
a significant share of their earnings either to support
families at home or retain them as savings in the home
country.
Thus, explaining the remittances surge, which has sustained
itself through the oil shock years and into the IT boom
period, is not difficult. The puzzle relates to the
question why this surge has not lost steam in the wake
of the financial and real economy crises that engulfed
both North America and West Asia during 2008. The construction
boom in the Gulf has indeed faltered. And demand for
outsourced services from the United States is bound
to have shrunk, especially since the financial sector
was a major source of demand for software and IT-enabled
services. Moreover, the recession has increased local
opposition to hiring foreign workers, leading to some
loss of job opportunities for short-term migrants to
the developed countries.
An often-provided reason for the persistence of the
remittances surge during 2008 is that the effects of
the crisis would have been felt with a lag, especially
given the oil price surge that preceded the downturn.
Further, a lag in the effects of the global crisis on
net services exports from India was to be expected,
given that contracts in software and Business Process
Outsourcing services are typically signed for long periods
such as two to three years. The effect of the crisis
would be on the renewal of contracts and the signing
of new contracts, and the initial impact on aggregate
revenues would be proportionately lower according to
the weight of legacy contracts in the total.
The lag was likely to be even longer in the case of
remittances because workers who lose their jobs abroad
and return home tend to bring their accumulated savings,
and this ‘windfall effect' could more than compensate
for the fall in the remittance flows resulting from
lower overseas employment. In addition, rupee depreciation
over 2008 accompanied by growing interest rate differentials
was likely to have encouraged larger remittances through
rupee denominated non-resident accounts.
Finally, remittances can reflect the conversion of past
savings into current flows. Private transfers which
are normally treated as remittances actually have two
components: ''inward remittances for family maintenance''
and ''local withdrawals/redemptions from NRI deposits''.
During the period 2006-07 to 2008-09, when net private
transfers rose from $30.8 billion to $43.5 billion and
then to $46.4 billion, local withdrawals or redemptions
of NRI deposits averaged about 43 per cent of total
remittances. As the Reserve Banks of India's Annual
Report for 2008-09 explains: ''A major part of outflows
from NRI deposits is in the form of local withdrawals,
which are not actually repatriated out of the country
but utilised domestically, making them equivalent to
unilateral transfers without any quid pro quo. Such
local withdrawals/redemptions cease to exist as external
liability in the capital account.'' This implies that
a significant part of the increase in ''remittances''
during 2008-09 was the result of the redemption of past
savings rather than the transfer of a part of current
incomes. This too would have moderated the impact of
the global crisis on remittance flows. Inasmuch as past
savings if tapped for current consumption would run
out for some workers, this too could lead to a lagged
effect of the crisis on the remittances figure.
This seems to be the experience in Latin America. Thus,
the World Bank reports that globally, ''the slowdown
in remittance flows that became evident in the last
quarter of 2008 has continued into the first half 2009.
As the US job market weakness continues, officially
recorded remittance flows to the Latin American and
the Caribbean region have dropped significantly in the
first half of 2009.'' However, in contrast to this, remittance
flows to South Asia and East Asia have continued to
post strong growth in 2009. This according to the World
Bank is partly because the GCC countries which attract
a large share of Asian migrants have not significantly
reduced their hiring and partly because of an increase
in remittance flows to finance investment, as a result
of ''falling asset prices, rising interest rate differentials
and a depreciation of the local currency''. But the pace
of construction in the GCC countries is finally slowing,
the rupee's depreciation has halted and interest rates
in India have been reduced in response to the deceleration
in growth. As a result the Bank expects the crisis to
have an adverse effect on remittances to India too in
the year ahead. In fact, according to the Reserve Bank
of India, quarterly figures point to a moderation in
the flow of remittances in the second half of 2008-09,
which it attributes to the adverse effect on employment
of the financial crisis and the collapse in the price
of oil that is affecting activity in the Gulf countries.
All that having been said, it is undeniable that remittances
have been and remain a major source of strength for
the Indian economy, especially for its balance of payments.
And given the accumulated stock of migrants abroad,
this is unlikely to change all too soon, even if some
are forced to return. This perhaps is a factor that
needs to be emphasised a little more when explaining
India's growth success.
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