Why remittances matter

Tue, 15 Apr Pre-Open

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While the Indian rupee has strengthened against the dollar in the recent past, the same was not the case for the full year 2013. With the currency weakening then, the inflow of remittances - money sent to people in India from abroad - increased on a year on year basis.

As per the World Bank, India received US$ 70 bn in the form of remittances in the year 2013. With this, it topped the list of countries receiving remittances from overseas workers. China ranked second (US$ 60 bn) while the Philippines came in a distant third place (US$ 25 bn).

The total amount of remittances sent to developing countries stood at US$ 404 bn in 2013; India's share stood at 17% of this figure. This year, i.e. in 2014, the figure is expected to increase by 7.8% YoY to US$ 436 bn. As per the World Bank, the amount would rise to US$ 516 bn by 2016.

As compared to the total global remittances - including those to high-income countries - the figure stood at US$ 542 bn in 2013. As such, the remittances to the developing countries formed about three-fourth of the total and India's share formed about 13%.

Why have these figures gained importance in recent years? Because the same has become a major portion of India's balance of payments - economic transactions of a country with the rest of the world over a period of one year. And the same impacted the country's current account deficit (CAD) figure, a parameter that has closely been gauged over the past few years. In the 9mFY14 period, India's CAD declined to 2.3% of GDP as compared to 5.2% during the corresponding previous period.

When this figure is compared to that of the software industry's export revenues, it puts things in perspective all the more. In 2013, the Indian software industry reportedly earned revenues of US$ 65 bn, a smaller figure when compared to the amount of US$ 70 bn that came in, in the form of remittances.

As per the World Bank's Manager of the Migration and Remittances Team, migrants living in high income countries have savings estimated to over US$ 500 bn annually. As such, these would provide a huge pool of funds that can be tapped as well.

While that may be the case, it may be noted that these are just temporary measures to keep the CAD levels in check. Major volatility, especially if the Rupee strengthens from here on, could possibly reverse this trend. But going by the World Bank's predictions, it does not seem that India's deficit figure will face problems on account of remittances in the short term.