India is the largest recipient of remittances in the world. The data from the balance of payment indicates that private transfers mainly representing remittances by Indians employed overseas remained at $83 billion in FY19 and FY20. After declining modestly to $80 in FY21, it again improved to $89 billion in the financial year ending March 22.
Remittances are an important part of the national income of developing and low income countries. They play a significant role in economic development of these countries. As per the World migration report 2022, there were 281 million (or 3.6% of the world’s population) international migrants globally with 169 million (60% of total migrants) labour migrants in 2020. Assuming an average household size of four, more than 1 billion people benefited from the remittance flows in 2020. Furthermore, the data shows that the top destinations of international migrants were the USA, Germany, Saudi Arabia, Russia and the UK. Meanwhile, the largest number of international migrants in 2020 originate from India followed by Mexico, Russia, China and Syrian Arab Republic, with Syria having a large number of refugees due to widespread displacement over the last decade.
Meanwhile, global remittances have increased more than 5 times over the past 2 decades. Of the total international remittances of $702 billion recorded in 2020 (decline from $719 billion in 2019 owing to Covid-19 pandemic) around 77% or $540 billion was received by low and middle income countries. High-income countries including the USA, UAE, Saudi Arabia, Switzerland and Germany are the top countries sending remittances. On the other hand, developing countries, India and China received the maximum remittances ($83 billion and $59 billion respectively) in 2020, followed by Mexico, the Philippines and Egypt. Even though in absolute terms the remittances are significantly higher in India and China, their share as % of GDP is very low (3.1% of GDP and 0.1% of GDP respectively). But certain smaller countries like Tongo, Kyrgyz Republic, Tajikistan, Lebanon, Nepal depend significantly on remittance flows. The share of remittances in GDP of these countries is more than 24%.
When travel restrictions were imposed due to the pandemic, it was thought that remittances would be badly hit. However, the overall decline in 2020 was only modest when compared to 2019, -2.4% yoy. This has been possible due to policy response to support remittance flows together with shift from informal channels (movement of cash through borders) towards more formal channels through increased digitalisation of financial transactions. The impact of the pandemic on remittances, though limited, has been uneven with certain countries (Europe and Central Asia in particular) and certain workers (those engaged in severely affected sectors as travel and tourism) being affected more than others. Many workers lost their jobs or had to come back to their native countries while others got stuck in foreign countries with no job and money or had to undertake pay cuts. However, some migrants benefitted due to various welfare programs of their respective host countries and sent back more money.
Another incident which is likely to have a negative effect on remittance flows is the Russian invasion of Ukraine. It is more than 5 months with no signs of the war drawing to a close. Countries of Central Asia including Tajikistan and Kyrgyz Republic where the dependence on Russia for remittances is quite high (82% for the latter and 76% for the former) will be impacted significantly by the persisting war. As per the World Bank, the remittances flowing to Tajikistan from Russia are likely to fall by more than a fifth, thereby leading to shrinking of its economy by 2%. Even Kyrgyzstan economy is projected to decline by 5% with the remittances from Russia expected to fall by a third. Coming to India, it is the largest recipient of remittances in the world. The data from the balance of payment indicates that private transfers mainly representing remittances by Indians employed overseas remained at $83 billion in FY19 and FY20. After declining modestly to $80 in FY21, it again improved to $89 billion in the financial year ending March 22. The RBI survey-based remittance estimates 2020-21 shows that India received maximum remittances from USA, followed by the UAE, UK, Singapore and Saudi Arabia. These top 5 countries accounted for 59% of the total remittances flow to India. Interestingly, UAE was the top source country as per the previous survey 2016-17 and it has been replaced by the USA now. Apart from that, the UK and Singapore too emerged as important source, replacing Qatar and Kuwait from the top 5 sources of remittance inflows. In fact, the share of Gulf Cooperation Council (GCC) group together has declined to 30% from more than 50% in 2016-17, owing to various factors, including low oil price and slow pace of migration amidst stricter labour laws, higher work permit renewal fees and taxes. The pandemic further led to lower demand for white collar workers in these countries.
If we look at the state wise distribution of remittances, Maharashtra is the top recipient with its share in total inward remittances increasing significantly to 35.2% (from 16.7% in previous survey), pushing Kerala to the second position (10.2% share compared to 19% earlier). Tamil Nadu (9.7%), Delhi (9.3%) Karnataka (5.2%) are the other major recipients of remittances. These top five sates account for around 70% of the total remittances. The remittances are the major source of foreign exchange for India besides being used to finance our huge trade deficit. This necessitates building and developing a conducive policy ecosystem for these flows such that they flow to India at lower cost. In line with the crucial role that NRI remittances play in our country, the RBI has recently liberalised NRI deposits.
To conclude, remittances are the lifelines for low income developing countries. This can be supported by the fact that for more than 60 countries, international remittances represent at least 5% of their GDP. Those against migration and remittances argue that there are potential costs to the country receiving remittances if moving out from the country creates labour shortage in the home country or if the remittances sent are significantly high, then it can lead to appreciation of the currency, thereby making its exports less competitive. However, these costs are not of value when seen in the context of resource scare low income developing countries. Remittance inflows for low and middle income countries are even higher than FDI and aid. Efforts should thus be made by the authorities to reduce transaction costs. As per the World Bank, global average cost of sending the remittances is currently 6.09% of the amount sent for US$ 200 and the UN SDG target is to reduce it to 3% by 2030. In this context investment in digital technologies by remittance service provider will help a long way in reducing the cost of remittance flows and will also ease the KYC process.
The author works as a senior economist in the Indian banking sector with core interests in public administration, external sector dynamics and global economics. Previously, she has worked on country risk analysis of emerging market economies with a French consulting firm. She holds a Master’s degree in economics from the Jawaharlal Nehru University and a bachelor’s from Sri Venkateshwara College, Delhi University.