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Remittances to India — Resilient to Domestic and External Shocks

Poonam Gupta's picture

Having surpassed the annual volume of portfolio capital flows or official development assistance, remittances are among the largest and most stable external flows to developing countries. As per the World Bank estimates, remittances to developing countries have increased steadily over the years, from $324 billion in 2009 to $436 billion in 2014. The resilience of remittances has not been uniform across countries though. It has depended crucially on the economic conditions in the host countries where a country’s diaspora population lives; and on the kind of economic activities that it primarily engages in. Remittances are affected adversely during economic slowdown in the host countries, and especially if the diaspora engages in cyclically volatile activities, such as construction.

India has been the largest recipient of remittances for several years--remittances having grown steadily from a modest magnitude until early 1990s. Their modest magnitude in prior years is attributed to the low level of financial development, high cost and time to remit money, appreciated rupee under the fixed exchange rate regime, and the restrictions on transactions involving foreign currency. These conditions changed with the liberalization in early 1990s when the currency was devalued by about 30 percent within a year and later floated; the current account transactions were liberalized; and financial liberalization and other technological advancements reduced the time and cost to remit money. Additionally, since some of these developments reduced the arbitrage in remitting money through unofficial routes, remittances were more fully captured in the balance of payments. Remittances grew at a rapid pace of 11 percent a year between 1996 and 2005. A second spurt in remittances was evident in subsequent years, when they increased at 15 percent a year, consistent with the country’s increased global integration through trade, financial flows as well as the movement of people.

Remittances to India have been stable—their annual movement is dominated by a linear trend, with limited volatility observed around the trend.  Since a proportion of migrants from India are high skilled, and employed in sectors exhibiting weak cyclical volatility such as IT, health and education, remittances are relatively insulated from the business cycle conditions in host countries. In recent years, remittances have responded to the movements in the domestic and international interest rates, stock market valuations, and domestic economic cycles-- an increase in domestic interest rates; decline in international interest rates; increase in equity prices, have been associated with modest increase in remittances.

The World Bank Migration and Development Brief (2015) has predicted a less robust outlook for remittances to developing countries in 2015, when they are expected to grow at a meagre 0.9 percent to $440. To the extent that remittances are positively correlated with the access to banking, the ongoing financial inclusion drive in India, under the Jan Dhan Yojana, may help it avoid the projected slow growth in remittances globally. The medium term downside risks include economic slowdown in oil exporting countries in the Middle East (it being the largest destination of migrants from India). Since remittances respond to the interest rate differential, an impending increase in the US interest rates, may also have a short term negative impact. These adverse impacts are however likely to be counterbalanced by India’s improved growth prospects that tend to attract investment-oriented remittances.

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