The Gulf lost some charm for India last fiscal, both as a destination for exports and a source of remittances, but a hard look at the numbers suggests the situation isn’t as bad as it appears. India’s goods exports to the Gulf Cooperation Council (GCC) declined 18.7% in fiscal 2016. To be sure, the decline in exports has been led by falling oil prices which have brought down the value of petroleum exports. A quarter of the exports to the region, incidentally, are petroleum products.
Falling oil prices have had a sweeping impact on the oil producing economies of GCC, severely denting their oil revenues and spending by both governments and households.
This has had a negative impact on remittances from the region, which declined for the first time in six years, falling 2.2% in 2015. More than half of India’s remittance income comes from GCC.
India’s net external position with GCC is intact—thanks to remittances
On a positive note though, while falling oil prices have curbed India’s exports to GCC, imports from GCC have also fallen steeply. In FY16, imports from these countries fell at a faster clip of 34.2%.
This has helped alleviate some stress from lower remittance and export income. In fact, India’s trade deficit with the GCC has fallen a whopping $44 billion, or 76%, in three years, to $14 billion because of rapidly declining imports.
So, while the big news is that remittance incomes from GCC have dropped, what is less known is that, even at the current level (around $36 billion), remittances have been stickier and more than funded the goods trade deficit—leaving a surplus of $22 billion. Indeed, at the all-India level, remittances were only 0.6 times the goods trade deficit in FY16, whereas with GCC they were 2.6 times. However, going forward, as oil prices start rising and trade deficit expands faster than remittances, some of these gains could reverse.
Remittances story holds out hope
India, maintaining its top slot globally, is estimated to have received remittances worth $68.9 billion in 2015 compared with $70.4 billion in 2014. Remittance from GCC was also marginally lower at $35.9 billion compared with $36.7 billion.
A few points worth highlighting here:
First, the growth slowdown in GCC remittances was marginal (down 2.2%) despite a 47% slump in oil prices in 2015. This indicates that these economies—especially Saudi Arabia and the United Arab Emirates (UAE), which are the largest two remitters within GCC—are relatively less dependent on oil income. As such, given the bearish oil price outlook, most of these countries are expediting efforts to diversify their economies, as the Saudi Arabia Vision 2030 plan testifies to.
This also seems to tie up with a 2015 World Bank study which finds that the elasticity of outward remittances from GCC countries with oil price decline is small, at around 0.1. Of course, if oil prices continue to remain too low for too long, the sovereign wealth of these nations would deplete faster and the elasticity may not remain that low in future.
Nevertheless, even as oil prices are expected to remain low for some time to come, we have possibly seen the trough for now and prices are only expected to recover from here.
Second, the World Bank noted in a press release on April 13: “Remittance flows are expected to recover this year, after a bottoming out in 2015, with growth driven by continued economic recovery in the United States and the euro area, and a stabilisation of the dollar exchange rates of remittance-source countries.” This suggests that even if there is some downside to remittances flowing into India from GCC, the rest of world will make up for it.
Third, India’s dependence on remittances and the resultant vulnerability is much lower than some of its Asian peers who receive similar proportions of remittances from GCC countries. The accompanying chart plots the current account deficit (CAD) ex-remittances as a share of GDP. It indicates how much each country’s current account deficit would be if it were to not receive any remittance. The data supports the point made earlier about any slowdown in remittances from GCC due to lower oil prices getting more than compensated by lower oil imports in value terms.
With the slide in exports more than matched by the slide in imports, India’s trade deficit with GCC as well as well as the rest of the world has narrowed. However, if oil prices remain weak for an extended period, economic activity in GCC will come down sharply as the fiscal stress mounts. This can certainly impact GCC remittances to India.
Joshi is chief economist, Deshpande is senior economist and Verma is economist, CRISIL Ltd