End of the Indian Gulf dream for remittances?

The sharp decline in the share of remittances from Gulf countries reflects a slower pace of emigration from India

End of the Indian Gulf dream for remittances?
The sharp decline in the share of remittances from Gulf countries reflects a slower pace of emigration from India.

N Chandra Mohan

Remittances or private transfers from the vast Indian diaspora – working not only in the Gulf region but also in developed nations like the US and Europe – to the home country are the highest in the world at $89 billion or 3% of GDP in 2021, according to the World Bank. These transfers have transformed India’s external profile into one of the biggest strengths of the economy. They are relatively more stable and resilient in face of economic shocks unlike foreign portfolio investments that are pro-cyclical in nature, rising in good times and falling in bad times.

Without the steady remittance inflows, India would have registered higher current account deficits or the imbalance in goods and services trade with the rest of the world than otherwise. Remittances augment savings and investments of recipient households and reduce poverty.

The Reserve Bank of India’s fifth round of the survey of remittances for 2020-21 – the earlier one was during 2016-17 – however indicates that times are a-changing with the share of Gulf countries sharply declining to 30% from more than 50% in 2016-17. The pole position for such transfers is the US which has surpassed the United Arab Emirates as the top source of remittances, accounting for 23% of private transfers. This is also corroborated by World Bank’s estimate of a fifth of total remittances to India. RBI’s findings raise concerns about the sustainability of such private transfers. The oil-financed construction boom in the Gulf is long over and there is less need for Indian unskilled professionals who built the infrastructure.There is also a growing preference for hiring local labour than emigrants in these countries.

The sharp decline in the share of remittances from Gulf countries reflects a slower pace of emigration from India. The share of traditional recipient states like Kerala, Tamil Nadu and Karnataka, which had a strong dominance in this region, have also almost halved in 2020-21 accounting for only 25% of total remittances since 2016-17. Maharashtra has emerged as the top recipient state in the country dethroning Kerala. According to RBI, host country dynamics, narrowing wage differentials, changing occupational patterns in these states with increasing white collar migrants to the Gulf and entry of other low wage semi-skilled workers from other states like Uttar Pradesh, Bihar and West Bengal underlie these compositional shifts. More than 50% of approved emigration clearances for the Gulf region in 2020 were for these latter states.

Kerala is the ground zero for these shifts as out of its 2.12 million emigrants across the world in 2018, the Gulf region absorbed 89.2% of them. The UAE has been the favourite destination. The recent data portend the end of a long era of emigration as has been observed in the two decades of pioneering research done at the Thiruvananthapuram-based Centre for Development Studies (CDS) on emigration and the impact of remittances on Kerala’s economy. CDS has completed large-scale surveys in 1998, 2003, 2008, 2011, 2013 and 2018. A Return Migration Survey was done in 2009 to study the pre-recession (Oct-Dec 2008) and recession (Jun-Aug 2009) experiences of emigrants from that state. These surveys clearly highlighted a decreasing trend of emigration from Kerala to the Gulf by as much as 300,000 persons between 2013 and 2018.

Kerala’s Gulf dream is perhaps over for a number of reasons, besides the construction boom petering out. Demographics are responsible with the shrinkage in the young working age population in the state. Moreover, wage differentials between the Gulf and those prevailing in the state have reduced. There is also growing competition from other states as noted by the RBI. Costs of emigration have also gone up, according to the CDS working paper on Emigration and Remittances: New evidences from the Kerala Migration Survey, 2018 by professors Irudaya Rajan and KC Zachariah. Later on, Covid-19 took its toll due to the slowdown in the Gulf, sluggish oil prices, stricter labour laws, higher work permit renewal fees and taxes, pandemic-induced travel restrictions, all of which resulted in a massive reverse migration back home.

The prospect of large-scale return migration with its attendant impact on remittances obviously has serious consequences for Kerala’s economy as remittances account for a fifth of net state domestic product. If the state’s experience is a precursor for the rest of India, the question is how long will the good times last on the remittances front? What would be the impact on the Indian economy? Right now, private transfers from teachers, nurses and other skilled professionals in the US might result in a brief uptick in overall numbers. But with the growing backlash against immigrants in developed countries, there are doubts whether such inflows will keep rising. The World Bank projects that due to uncertain global economic conditions, remittances to India will increase by 5% both this year and 2023.

(The writer is an economics and business commentator based in New Delhi. His views are personal)

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