India’s transactions with the rest of the world are showing signs of strain. Our forex reserves have shrunk by $63 billion. But good news comes from foreign shores in the form of a surge in remittances from the Great Indian Diaspora. This year, according to the World Bank, the moolah pumped into India is estimated at $30 billion.
India is the largest recipient of remittances in the developing world, followed by China and Mexico. During the first quarter of 2008-09, remittance inflows of $11.5 billion actually exceeded the net inflows of foreign direct investments into our economy. Such transfers from Indians, working not only in West Asia but also in the US and Europe, are most welcome. They have transformed India’s external profile into one of the biggest strengths of its economy. Foreign exchange and a precarious balance of payments situation were often a constraint on our growth. Not any more.
The easing of the external constraint is a profound transformation, the likes of which is not adequately appreciated these days. Without the boom in remittances — which have increasingly flowed through official banking channels following the transition to a market-determined exchange rate since the 1990s — India would have registered higher current account deficits than otherwise. Net of remittances, this deficit would have been twice the amount at $22 billion during the first quarter of 2008-09.
According to Dilip Ratha of the World Bank, remittance inflows are also more stable than portfolio investments that are pro-cyclical in nature — rising in good times and falling in bad times. “They are less likely to suffer the sharp withdrawal or euphoric surges that characterise portfolio flows to emerging economies.” Overseas residents are also more likely to invest in home countries despite economic adversity than foreign investors. Remittances augment savings of recipient households and help in poverty reduction.
However, looking to the immediate future, there is a bit of bother over the sustainability of private transfers. The global financial crisis has already resulted in a slowdown in remittances during the third quarter of this year that will deepen further in 2009-2010.
Even so, they will be more resilient and less volatile than portfolio investments. They will, thus, continue to remain an important source of forex even as India weathers the global economic turmoils.