Expert Zone

Straight from the Specialists

Remittances support to balance of payments

December 8, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

For quite some time now, exports of goods have trailed behind imports leaving a huge deficit which has been partly made up by the surplus in services trade, an important component of which is remittances from overseas.

In 2010-11, with the surplus in services trade the current account deficit was reduced to 2 trillion rupees. The surplus in services trade comes mainly from household remittances from overseas which exceeded 2.1 trillion rupees. Remittances brought down the goods account deficit by 41 percent.

Remittances from overseas have been substantially more than even FII investment. In 2010-11, which was one of the good years for FIIs, inflow of investment was 1.3 trillion rupees, about half of the remittances that came in. FII and FDI together more or less matched the remittances from abroad.

While foreign investment has been irregular (being sensitive to economic and political risks), can we rely on remittances as a steady and growing resource particularly in the context of a possible recession in the U.S. and EU and the uncertainty in oil prices?

The World Bank has reported that total remittances from migrant workers to developing countries would amount to $353 billion in 2011 and $483 billion inclusive of developed countries. India was the largest beneficiary with an inflow of $58 billion followed by China with $57 billion.

The World Bank expects that the 8 percent growth in remittances may continue in the next three years. Total remittances in 2014 would amount to $593 billion. Remittances to India can increase even faster at around 10 percent with an inflow of $210 billion over the next three years. That would provide a good support to the balance of payments.

The downside is the likely recession in the U.S. and EU. Migrant labour has helped developed countries remain competitive in the international market. But when unemployment is high, there is temptation to put selective restrictions on migrant labour. In the U.S., unemployment is a little less than 9 percent; in Europe even more. Political attitudes are hardening due to unemployment and restrictions on migrant labour become an easy option. Even in the GCC countries which have been a major source of remittances to India, there are likely to be quotas in order to generate more jobs for the local people.

In spite of this downside, it is likely that remittances to India may keep their pace. First, the rupee has substantially depreciated but inflation has been much higher. Hence, a migrant worker will have to remit more in order to maintain his family in India. Second, the cost of remittances is coming down and interest rates in India are high which may encourage larger remittances. It appears that remittances are a dependable source of funding a part of the current account deficit and therefore care needs to be taken to see that their flow is maintained.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  • Editors & Key Contributors