While the slowdown of capital inflows, especially foreign direct investment (FDI), into India’s economy has triggered serious concerns of late, there is yet another inflow that surges year after year without raising any worries whatsoever. This pertains to remittances or private transfers from the Indian diaspora that has been estimated at $70 billion in 2012 according to the World Bank. Remittances from Indians, working not only in West Asia but also in developed nations like the US and Europe, are welcome as they have transformed India’s external profile into one of the biggest strengths of the economy.
During much of post-Independence India, foreign exchange and a precarious balance of payments situation was often a serious constraint on overall growth. Not any more. One important reason for this is the ongoing boom in remittances that were resilient even during the global recession of 2008-09. Such inflows help in financing the current account deficit – which is the broadest measure of the country’s trade imbalance in goods and services – expected to be around four per cent of the Gross Domestic Product. The easing of the external constraint is a profound transformation from the earlier decades of development.
Though remittances are expected to keep rising, there are doubts, however, about their sustainability in the future. After all, the West-Asian oil-financed construction boom is over and there is less need for unskilled Indian workers who built the infrastructure. As the process of recovery from the 2008-09 global crisis is also far from complete – with the most powerful economy in the world, the US, likely to slip into recession – there is a growing backlash against migrants in the developed world. How much longer will the emigration of Indian teachers, nurses and software techies sustain private transfers?
In this context, Kerala’s experience is relevant since it vitally depends on private transfers, which amount to one-thirds of its net state domestic product. The Thiruvananthapuram-based Centre for Development Studies (CDS) has been doing pioneering work on emigration and the impact of remittances on Kerala’s economy. CDS has, in fact, completed five large-scale surveys on migration — in 1998, 2003, 2007, 2008 and 2011. A Return Migration Survey was done in 2009 to study the pre-recession (October-December 2008) and recession (June-August 2009) experiences of emigrants from that state.
These surveys point to a decreasing trend in emigration from Kerala, bulk of which is to West Asia. Although the overall emigration numbers in 2011 was no different from the levels in 2008, important centres like Pathanamthitta district are already experiencing a decline in the number of emigrants and/or emigrants per household. This process could reach its “inflexion point in a matter of four to five years”, argues a recent CDS working paper by Professors K C Zachariah and S Irudaya Rajan titled “Inflexion in Kerala’s Gulf Connection: Report on Kerala’s Migration Survey 2011”.
The era of large-scale emigration to West Asia is largely 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 – monthly wages for unskilled workers in the United Arab Emirates were around Rs 11, 869 as against average daily wages of Rs 450 back home – have narrowed. There is also growing competition from other states. Costs of emigration have also gone up according to the CDS working paper.
If Kerala’s experience is a precursor for the rest of India, the big question is how long with the good times last on the remittances front? What would be the impact on the Indian economy? Without the boom in remittances, India would perhaps register higher current account deficits than otherwise. Financing this gap will become a serious policy concern if FDI inflows remain sluggish as they are at present. Relying on portfolio investments is a highly risky strategy as they are pro-cyclical in nature, rising in good times and falling in bad times. Such inflows are highly volatile as well.
Research has established that remittances augment savings and investments of recipient households and help in poverty reduction. If such inflows reduce over the near term, they would worsen these distributional outcomes. While remittances contribute to better economic performance, they are also a source of output shocks when they turn volatile — see a recent discussion paper on the effect of remittances for 24 Asia/ Pacific economies by Katsushi S Imai, Raghav Gaiha, Abdilahi Ali and Nidhi Kaicker for the Asia-Pacific Division of the International Fund for Agricultural Development.
Such outcomes will be more keenly felt in Kerala that is highly dependent on remittances — the “single most dynamic factor” in its economic scenario according to the CDS working paper. There is bound to be an adverse impact on the labour market as this state has the highest unemployment rate in the country. If more and more emigrants return, the rate of joblessness would spike upwards. Lower remittances, in turn, would lower per capita income, all of which contribute to social tensions. The challenge for policy is to cope with such inflows becoming less important for India’s external profile.
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