Steady inflow

Money changers lined up at Perunna in Kerala. The surge in remittances from migrant workers did not weaken in 2008 despite the recession.-K.K. MUSTAFAH

HAS unemployment or unsatisfactory employment at home proved to be a boon rather than a bane for India? That seemed to be the message that came through when the World Bank reported that in crisis year 2008, India 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 increased by more th an 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, Indias balance of payments statistics indicated 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, such as 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 returned.

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, regionwise, North America accounted for nearly 44 per cent of the total remittances to India, followed by West Asia (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 U.S. and Europe. In the U.S., for example, the flow of software and IT services workers required to provide onsite services to clients of Indian firms under the H1B visa provision increased substantially. These workers, who were paid a full salary or a substantial allowance while resident in the U.S., saved and transferred a significant share of their earnings either to support families at home or to 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 in 2008. The construction boom in the Gulf has indeed faltered. And demand for outsourced services from the U.S. 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 in 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 [non-resident Indian] deposits. During the period from 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 Bank of Indias 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 U.S. 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 (Gulf Cooperation Council) 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 rupees depreciation has halted and interest rates in India have been reduced in response to the deceleration in growth. As a result, the World Bank expects the crisis to have an adverse effect on remittances to India, too, in the year ahead. In fact, according to the RBI, 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.

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 Indias growth success.