COVID-19 | Challenges tumbling remittances pose for India

Gourishankar S Hiremath and Harikrishnan KS

India has been consistently retaining its top position in global remittance-receiving for many years. The inward remittances are one of the significant sources of forex reserves and finance less than half of India's current account deficit (CAD). Besides, the remittances are the primary bulwark of the dependent households in India.

However, the COVID-19 outbreak and widespread economic shutdown pose a threat to the stable inflow of remittances. According to World Bank estimates, remittances to India are set to tumble a whopping 23 percent in 2020. This decline could have serious implications on the Indian economy.

Remittances And CAD

Amid fears of a global recession, the COVID-19 outbreak came as a bolt out of the blue. Close to 4 million people are infected, and more than 260,000 have succumbed to it. The pandemic and consequent lockdowns are ruffling the economies worldwide. The IMF projects a 3 percent negative global growth rate in 2020, and a prolonged recovery later.

The United States and West Asia are expected to grow at a negative rate of 6.1 and 2.6 percent, respectively. These regions constitute the lion's share of Indian migrants. Also, the International Labour Organization (ILO) estimates about 25 million job losses. As a result, migrant workers are vulnerable to the fall in wages and loss of employment.

Given the nature of infection and no signs of it slowing momentum, economic revival and employment generation is going to be a formidable challenge. The consequent loss of remittances will perniciously affect the trade deficit.

Core Strength Will Help

To make the matter worse, oil prices plunged because of the price war between Russia and Saudi Arabia, among other factors. In the past, the loss in remittances from West Asia was partially compensated by other regions that were benefitted from low oil prices. Such a possibility is ruled out in the current situation.

India could improve its trade deficit with cheaper oil imports and thus compensate for the loss of remittances to some extent. This possibility is also bleak in light of the worst performance of the rupee against the US dollar. This situation is likely to continue till the economy picks up.

Financing India's CAD is a significant challenge. Foreign direct investment (FDI) will look less attractive until the economy shows notable signs of recovery. India has been defying global trends since 2008, and will continue to be a potential destination for Foreign Institutional Investors (FIIs) as the economic fundamentals — especially in the organised sector —are strong. Thus, the restrictions on FIIs can be relaxed further to boost the inflows, and tapping them to finance the CAD is an option.

Besides, Indian firms, especially the large corporates, should be exhorted to resort to the external commercial borrowing (ECB) channel. Such a policy accompanied by lifting the caps on ECB will not only boost the productive capacity at a low-cost debt, but will also help finance the CAD. The implementation of prudential norms for imports of luxury and non-essentials in the short term is inevitable until capital inflows are stabilised.

The cost of remittances was a primary determinant of international remittances. The Reserve Bank of India (RBI) and the banking sector must strive to reduce the cost. Encouraging Fintech firms with incentives can help on this count.

Welfare Implications

A large part of the remittances is spent on consumption, small investment, and repayment of loans. Apart from the social cost, a substantial reduction in remittances adds to woes of the struggling banking sector by making loan recovery difficult. India is the largest supplier of semi-skilled and unskilled workers to West Asia. The majority of them are from Tamil Nadu, Kerala, Andhra Pradesh, Uttar Pradesh, and Bihar. These workers have to bear the brunt of the crisis more than their skilled counterparts.

The plunge in oil prices and COVID-19 has been forcing countries to adopt austerity measures and downsize migrant workers. The reverse migration in such a case will add to the growing unemployment in India, and worsen rural poverty.

A massive constellation of welfare measures by the government is indispensable to foil the devastating effect of the pandemic. An unprecedented situation, more often than not, demands an unorthodox policy intervention.