India is the top recipient of remittances

With Sanket

Newly available data show that remittance flows to developing countries reached $328 billion in 2008. In India, flows were stronger than expected in 2008 reaching $52 billion, up 34% compared to a year ago, and higher than our earlier estimate of $45 billion. India retains its position as the top recipient of migrant remittances among developing countries, followed by China, Mexico and the Philippines (figure 1).

Figure 1. India was the top recipient of migrant remittances among developing countries in 2008

Some of the factors responsible for a surge in remittance to India in 2008 include: increasing migration to the Gulf and other destinations, a weaker rupee (figure 2) together with widening difference between domestic and international interest rates, and boom in the real estate and stock markets (until mid-2008) which created investment opportunities (figure 3).  

Figure 2: Depreciation of the Rupee created incentives to send remittances for investment motives, but that incentive may diminish in 2009

An easing of regulations and controls and introduction of new technologies and products by Indian and international banks and exchange houses in the Gulf—such as direct transfers to bank accounts, free delivery of demand drafts to the recipients, and a growing array of remittance-linked financial products (home loans, mutual funds etc.)—reduced transfer costs and also shifted remittance flows to formal banking channels.

Figure 3: Widening interest rate differentials sustained incentives to send remittances

With the economic crisis in the developed countries deepening from mid-2008 onwards, the “safe-haven” factor of transferring savings to the home country at a time when international banks are not faring well and deposit rates are very low in the destination countries contributed to keeping remittances at the high levels reached in the early part of 2008. The depreciation of the Indian Rupee against the US dollar (after several years of appreciation) resulted in a “sale effect” as this made local assets cheaper and even more attractive for migrants (figure 2). These may have contributed to a shift in remittances being sent for consumption motives to investment motives.

Risk of a slow down in 2009

In terms of the outlook for 2009, there is risk of a decline going forward because of lagged effects of slowdown in destination countries, rupee appreciation and falling interest rates. The impact of the US economic and construction sector slowdown has been felt with a lag on remittance flows to Latin American and Caribbean countries. A similar lagged response in remittance flows to South Asia may arise from the current slowdown in economic activities in the Gulf Cooperation Council (GCC) countries. This is especially relevant for Kerala and other states that have migrant workers in the construction sector in Dubai. It should be noted that return of migrants as feared has not materialized.

The high base effect of a large increase in remittance flows in 2007-2008 will imply a relatively sharper decline for India. The rupee appears to have plateaued against the US dollar in recent months reducing the investment motive for sending remittances. The Reserve Bank of India has recently lowered interest rates to mitigate the impact of the crisis.  Remittances sent particularly for saving and investment motives could be substantially lower in 2009.

Remittance flows to India are expected to decline by nearly 7 percent in 2009. Flows to the South Asia region are also expected decline, but to a smaller extent due to robust growth in flows to Bangladesh, Pakistan and Nepal. However, the predicted decline in remittances would be far smaller than that for private flows to India, implying that remittances will become even more important for India’s economy.

But fear should not lead to phobia

In 1991-92, the first Gulf War in 1990-91 led to a large number of migrants returning to India. However, many of these migrants brought back their savings with them and remittance flows did not decline in that year. With the return to normalcy, many of these returnees were among the first to migrate again, and remittances to India continued their upward trend in subsequent years. Similarly, remittances to Jordan declined during the Gulf crisis, but increased sharply afterwards. The Jordanian economy boomed in the subsequent years as the Gulf returnees came back with business skills and capital for small enterprises.    

Instead business facilitation for returnees should be a priority. Indian policymakers should welcome the returnees—who will come back with skills, entrepreneurship and capital—instead of treating them as a burden. Policies to re-integrate the returnees can include improving self-employment opportunities, support for small and medium-enterprises (SMEs), and budget support to municipalities facing large returns. Indian policymakers can also learn from the experience of the Philippines, which has created institutional mechanisms to provide productive employment opportunities to returnees.

Finally, neighboring countries such as Bangladesh and Nepal have a large number of their emigrants in India and depend heavily on remittances. The number of Bangladeshi migrants in India is estimated to be in the range of 12-20 million. The Nepali rupee’s peg with the Indian rupee is sustained mainly by remittance flows from India. Given the importance of migration and remittances for South Asian countries, a priority for policymakers should be to facilitate legal, safe migration flows from Bangladesh and Nepal to India, and to recognize and encourage intra-regional remittance flows through formal channels.  

The resilience of remittances arises from the fact that while new migration flows have declined, the stock of migrants has been relatively unaffected by the crisis. Sources of risk to this outlook include uncertainty about the depth and duration of the current crisis, unpredictable movements in exchange rates, and the possibility that immigration controls may be tightened further in major destination countries.