Go back in time and you will realise that year after year, inward remittances to India have been far higher than the oft-talked about FDI. Apparently, this precious non-FDI well of funds has started to dry up.

Steven Philip Warner | May 2016 Issue | The Dollar Business

By now you would’ve heard of the leaked Panama Papers and the illicit capital movement and tax evasion scam that it has unearthed. Claims are that Panamian law firm Mossack Fonseca was hand-in-glove with leading individuals and entities around the world. The accused list includes names from Russia’s Putin, Pakistan’s Nawaz Sharif and Britan’s Cameron to the stars we love like Jackie Chan, Lionel Messi, etc. A big count of the world’s top 1% (individuals or corporations, capitalists or politicians) with muscles to exploit financial loopholes through setting-up of billion-dollar offshore agreements to questionable investments, has been named in 2.6 TB of data files. From much known entities like UBS, HSBC, FIFA, Société Générale, to the lesser-known kinfolk of Chinese President Xi Jinping, Vice-Premier Zhang Gaoli, former Premier Li Peng (and we were wondering why all information on the leak was blocked on the Internet in China in a matter of hours!), Icelandic PM Sigmundur Gunnlaugsson, former Egyptian former President Hosni Mubarak, and Syrian President Bashar al-Assad, besides many others, the leak has made itself explosively heard! This story of inappropriate dealings across offshore havens and improper piggy bank practices linked to people and nations, is one aspect that proves how in the current season, globalisation is flu-struck.

While on one hand, movement of goods in the global perspective is facing bad weather, the revelation of something like ‘Panama Papers’ proves that capital movement is not enjoying a completely clean ride either. Talking about capital transfers, away from all talk about tax havens and the elite 1%, the case of ‘foreign remittances’ is an area of interest for India (unlike the Panama leak, which hasn’t given India much trouble). The reason is simple. India being the nation that is the origin of the largest count of emigrants in the world (13.9 million during 2015 as per UNDP; followed by Mexico, China, Russia, Bangladesh, Pakistan and Philippines), is also the highest recipient of foreign remittances (that includes personal transfers and workers’ remittances). The forecasted figure for 2015 stands at $72.2 billion – a whopping Rs.4.8 lakh crores! – as per The World Bank, putting India ahead of others like China, Philippines, Mexico, France and Nigeria.

But this well of funds has apparently started to dry up. For the first time in over a decade, total remittances to India fell in CY2015 (by 3.1%). As was revealed recently, workers’ remittances to India fell for the first time in over 12 quarters. Never in the past five years has this inflow stream been smaller than in the previous year. Last year however, the unexpected happened.

Like we said before, the narrowing of this channel of remittances is neither a happy development, not a sign of great things to come for India. You ought to ask, why this very question of remittances? I mean, we don’t really hear this term every second day in the news like we do terms like FDI, Portfolio Investments, Trade deficit, Forex reserves, GDP, etc. Why would this term mean so much for Indians residing in India? If you missed reading the previous paragraph, I did mention that India’s emigrating population (temporary and permanent) per year is the largest in the world. A 2015 World Bank study claims that every year, over 1.4 crore Indian families are potentially affected by what happens to remittances (the estimate is based on the fact that in 2013 alone, as per UNDP, India was the source of 14 million emigrants). That’s reason #1. Reason #2 is simple. Remittances have undoubtedly remained a reliable source of foreign exchange to India and a great support to narrowing its Current Account Deficit (CAD). [In CY2015 alone, remittances nullified more than half (53%) of India’s merchandise trade deficit of $126.64 billion; DGCIS data.] Beat this for a fact – every year in the past five years (and I’ve only mentioned five years so that we don’t go back to digging out ancestral numbers), remittances to India have outclassed FDI in value. In CY2015, while foreign remittances to India touched $67.40 billion (as per RBI’s Balance of Payment reports; the figure stands at a higher $72.2 as per The World Bank), FDI inflow stood at a lower $36.70 billion. That means remittances to India was almost twice as large in value as compared to the oft-hyped FDI (and FDI is what the Make in India theatrical is all about, isn’t it?). Go back in time and you will realise that year after year, inward remittances to India have been far higher than FDI. [See chart, ‘Remittances versus FDI: What's more precious?’] That does force you to ask the question of “importance”, but we leave that to your intelligence.

What is peculiar about the fall in inward remittances during 2015 was that it occurred while the rupee continued to slip against the dollar. In the past decade, for reasons obvious, a depreciation in the Indian rupee has always had a positive impact on inward remittances. In fact, in the year that followed the last Global Financial Crises, while inward FDI and portfolio investments into India took a beating, remittances held its ground. RBI had then claimed that one major reason for inward remittances in India not being impacted significantly by the global economic crisis was the depreciation of the rupee [by about 10% in a matter of twelve months between early 2009 and 2010] resulting in the rise in inflows through rupee-denominated NRI accounts to make the most of the weakened currency back home. And this is one big fact that explains how between early 2011 and end-2014, while the rupee continued its downward ride, depreciating almost 39.0% in a matter of 48 months, inward workers’ remittances grew 39.8%! [That’s quite a direct effect, you’d reckon.] But what explains the 4.4% and 3.1% fall in workers' remittances and total inward transfers during CY2015 – a time when the rupee declined 5% between the first and last day of the year? Surely, this defiance of everyday economics is a cause for concern.

It’s perhaps too early to place the cursor on a number, but remittances may actually have seen the last of good news for some quarters, perhaps years. Close to 47% of remittances to India come from four nations in the Gulf (UAE, Saudi Arabia, Kuwait and Qatar) and that is one big trouble area. [As per World Bank estimates, besides US, migrants from India are concentrated in Gulf nations like the United Arab Emirates, Saudi Arabia, Kuwait and Qatar.] Between the start of 2011 and mid-2014, greater fall in the value of rupee meant higher inflow because oil prices remained stable between the $100 to $120 per barrel mark. [See chart titled, ‘Impact of oil prices on remittances’.] Fluctuations occurred. But almost every time, the abovementioned floor and ceiling held firm. Until in mid-2014, the rigs were shaken and oil prices gave many-a-nation hosting Indian migrants (responsible for the multi-billion dollar transfers that India receives each month) nightmares of the undertaker.

Obviously, they’ve passed on the fear to India (and other nations from where the migratory folks have originated).

Not to forget, these economies are based on steadily rising incomes fuelled by oil. Oil accounts for 85% of Saudi Arabia’s total exports, 65% of UAE’s, 94% of Kuwait’s and 83% of Qatar’s. So if the price of a barrel of oil falls by 60-65% in a matter of 15-18 months, these economies are sure to be affected.

Let’s do a quick build-up here… Take Saudi Arabia's case. Oil revenues account for about 80-90% of State revenues, and the US oil boom causing the undesirable market glut has created havoc for the nation. The country’s 2015 budget was based on expectations that oil would remain in the range of $90-$100 per barrel. It’s at less than half of that at present, which has resulted in a budget deficit that has exceeded the 20% mark and $100 billion in value terms. All this trouble has started showing on the unemployment rate too – as per CIA data, 30% of employable Saudi youth (below the age of 35) is jobless today. Now juxtapose this fact with this one – 90% of those employed in the private sector and 70% in the government are foreigners. So when a landslide of trouble hits the economy, which group becomes the first one to lose jobs or incomes? With oil prices forecasted to remain at under $60 per barrel mark for the next few years, the remittance stream to India from this country is expected to narrow down further. [For the record, Indian migrants account for about 8% of the total Saudi population!]

And here comes the final nail in the coffin – an announcement like the one that the Saudi government made on March 8, 2016. It launched a new nationalisation or Saudization program called “Guided Localization”, under the direct supervision of the country's Ministry of Labour. The aim of the programme is to implement “total” replacement of foreign workers with Saudis in phases across both skilled and semi-skilled job areas in the private sector over the next six months. We reckon this complete overhauling will call for more time than that, but it is for all means a practice to legally force firms to have 100% Saudi employees in time. Disaster will strike India’s remittance inflows if the other countries of the Gulf Cooperation Council were to implement such a programme. Like we said earlier, close to 47% of remittances to India come from four nations in the Gulf (UAE, Saudi Arabia, Kuwait and Qatar) and that is one big trouble area. One of India’s top geopolitical agendas in the coming weeks should therefore be to convince GCC members to avoid this carpet bombing!

Many in the industry also opine that even if GCCs were to cause India some trouble in remittances, the itch won’t last too long as our expat labour market will move to the West like US and EU (which account for 46% of India’s total remittances). Now, that’s naïve. Official data proves that of the total 25 million NRI work force that India has, 60% are unskilled, while the rest 40% belong equally to the semi-skilled and skilled categories. It is well understood that the larger proportion of remittances that come from Gulf nations originate from the unskilled and semi-skilled categories (that’s a huge 80%!), while those from US and EU are from Indian NRIs in the IT and financial sectors who are classified “skilled” (that’s just 20%). How does one expect to see unskilled and semi-skilled workers, four times in count and used to the oil rigs and regular shop-and-home chores, accommodate themselves in First World geographies that are only in love with India’s doctors, engineers, bankers and those in the knowledge arena?

Whenever it comes to capital movement, Indian media is busy writing about black money and something as newsy as the Panama leaks. But no one cares about remittances, bigger in value than even FDI, a stable source of forex revenues and which is primarily used (60% of the transfers on average) for household expenditure in India. Whenever it comes to capital movement, Indian media is busy writing about discovery of cost-effective remittance services in India and quoting our PM’s commitments made across G20 summits on reducing remittance costs, but little do they realise that the average cost of remittance to India from markets like UAE, US, EU, etc., is amongst the lowest in the world. Understood that transfers of small amounts can become costly with transfer costs rising by even a fraction of a percentage, but that will only improve when technology itself becomes a greater enabler, and security and risk lesser deterrents (and our policymakers can’t do much about that, can they?)! [As per Remittance Prices Worldwide (World Bank), average remittance cost on a transfer of $200 from UAE to India is 2.8%, and from US to India is 3.1%; data for Q4, CY2015. Compare this to the global average cost of 7.7% recorded during the same period!] What they can however do is to ensure that this particular mode of forex ‘river of support’ that was greater than all of India’s much-celebrated IT & ITeS, Telecom and Financial Services exports combined together last year, doesn’t suddenly flow off the cliff.

The larger percentage of remittances that come from the Gulf originates from the unskilled and semi-skilled workforce. And those from US
and EU are from Indian NRIs who are mostly classified “skilled”. If Gulf countries were to cause India trouble in remittances, you don't expect
unskilled and semi-skilled workers, four times in count and used to the oil rigs and regular shop-and-home chores, to accommodate themselves
in First World geographies that are only in love with India’s doctors, engineers, bankers and those in the knowledge arena!

Indeed, the situation at hand is a complex one. And we need the best of diplomacy to solve the riddle of existence for this trustworthy source of ‘precious forex’ for India. Else this becomes another case of growing, growing, gone!