India’s ailing remittances: Time to reassess policy priorities

May 21, 2020 5:00 AM

On the domestic front, expansionary fiscal and monetary policies; higher transfer payments; ensuring greater reach and effectiveness of livelihood schemes can all go a long way.

Unlike in the past, when remittance flows exhibited countercyclical movements during contractions or recessions, they will now be procyclical with respect to GDP and might unsettle India’s current account balances.Unlike in the past, when remittance flows exhibited countercyclical movements during contractions or recessions, they will now be procyclical with respect to GDP and might unsettle India’s current account balances.

By Amarendu Nandy

The suspension of economic activity due to the ongoing global pandemic is likely to affect global growth and stability. The IMF projects a 3% contraction in world GDP due to the ‘Great Lockdown’, leaving 170 countries with lower GDP per capita by the end of 2020. The WTO expects a decline 13-32% in global trade, contingent upon the length of Covid threat and protracted lockdown policy. The UNCTAD has warned of a brewing debt crisis in emerging markets.

Negative shocks to global growth and trade will get passed to the domestic economy via factor flows, financial flows, and movements in relative prices. One related and significant challenge concerns the effect on India’s remittances.

The World Bank’s latest Migration and Development Brief estimates a substantial drop in remittances to low and middle-income countries —from $554 bn in 2019 to $445 bn in 2020. For India, which has been the topmost recipient over the last decade, the fall will be much sharper—from $83 bn in 2019 to $64 bn in 2020—a 23% decline. The consequences of such a substantial fall in remittances can be damaging.

First, it shall create complex internal balance issues. Immediate and long-term economic adjustments in host countries will certainly have cascading effects on labour markets, and subsequently on ours. Demand for labour is likely to be rationalised in host economies through the implementation of automation capabilities across the value-chain, arguably in jobs with high contact intensity, mainly involving migrant labourers. Notwithstanding the outstanding contributions of migrants in critical frontline occupations in the fight against the pandemic, immigrants have been made convenient scapegoats for the spread of the disease. In the post-Covid period, such a hostile attitude towards immigrants is likely to rise.

Consequently, we may see a spike in return migration of unskilled and semi-skilled workers, particularly from the GCC countries. With muted growth, domestic labour markets will unlikely be in a position to absorb such returnees, worsening the domestic unemployment problem. Elsewhere, where host economies have more accommodative stance towards immigrants, downward wage adjustments will severely limit the ability of the migrants to send money back home impacting household welfare.

Second, it may generate severe growth- and welfare-reducing outcomes. The estimated $20 bn fall in remittance flows will shave off more than 0.7% of GDP and have a deeper impact sub-nationally. Kerala, Punjab, Tamil Nadu, Andhra Pradesh, Uttar Pradesh, Rajasthan and Bihar account for more than four-fifths of inward remittances. For states like Kerala, which currently receives over Rs 1 trillion in remittances, amounting to about 35% of GSDP, the impact could be profound.

A 2018 RBI study reports that almost three-fifths of remittances received by households were for family maintenance purposes. Such a substantial fall in transfers may push many migrant households back to poverty, and, in more disadvantaged migrant households, promote child labour.

Third, unlike in the past, when remittance flows exhibited countercyclical movements during contractions or recessions, they will now be procyclical with respect to GDP and might unsettle India’s current account balances. The pandemic is likely to worsen India’s merchandise trade deficit. Due to fall in foreign incomes and re-introduction of non-tariff barriers, India’s exports are expected to contract by $49 bn to $265 bn in FY21. While imports are also expected to fall to $350 bn on the assumption of benign oil prices, oil demand could normalise quickly. Also, production cut of 9.7 mn barrels/day under the OPEC+ deal could exert upward pressure on oil prices, increasing the import bill, and thereby, the trade deficit. In such a scenario, a fall in remittances will be a double whammy for the current account balances.

On the domestic front, expansionary fiscal and monetary policies; higher transfer payments; ensuring greater reach and effectiveness of livelihood schemes can all go a long way. On the external front, to counter restrictive immigration policies, India’s trade and investment agreements need to be broad-based and intertwined with India’s strategic interests in labour exports. Expanding economic relations to newer geographies can also facilitate labour flows, and diversify sources of cross-border transfers.

Remittances have been the largest source of external finance (ahead of ODA and FDI) for India, and have served important developmental goals, yet, has occupied less mind space of policymakers. It is about time we reassess our policy priorities in this regard.

The author is Assistant Professor, IIM Ranchi. Views are personal

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