The World Bank reported recently that remittance flows to developing countries had crossed the $400 billion mark in 2012. With 215 million international migrants across the world, a majority of whom are from developing countries, this should not be surprising. India has once again turned out to be the leading recipient of remittances, accounting for $69 billion in 2012, which is substantially ahead of that for the other major player in terms of population and geography, China, with $60 billion (Chart 1). The next in line was Philippines and then Mexico, with a much smaller $24 and $23 billion respectively.

The significance of these remittances even for an economy like India should not be discounted. While it amounted to just 3.7 per cent of the country’s dollar GDP in 2012 (as compared with 47 per cent in the case of Tajikistan), it covered as much two-fifths of the merchandise trade deficit recorded that year. For a country faced with a widening trade deficit that has pushed the current account deficit to record levels, that is no small comfort.

What is remarkable is the steady trend that remittances show, when compared to the extreme volatility of flows of foreign direct investment, portfolio capital and external debt, especially in recent years (Chart 2). Other then for a slight fall in 2009, when the world was steeped in the Great Recession, global flows of remittances have been rising consistently since 1990, with signs of acceleration after the turn of the century.

India has been a leading beneficiary of this trend because, unlike many other countries that rely on remittances from unskilled and/or semi-skilled migrants, it has in recent years combined that stream of inflows (originating largely from the Gulf countries) with a significant inflow of remittances from highly skilled workers (originating largely in the US and Europe).

The sources of India’s remittances have shifted over time. Immediately after the oil shocks of the 1970s, the short-term migration trail was dominated by the flow of masons, carpenters, and unskilled workers drawn by the construction boom in West Asia. Migration to other parts of the globe, especially its developed centres like the United States and the United Kingdom, consisted of permanent migrants, who retained most of their savings in their countries of residence. Short-term migrants often had their families at home to maintain and chose to transfer their savings home, being attracted by the higher interest rates and driven by the need to accumulate their savings to support them when they return.

The transformation that has taken place in the sources of remittances over the last decade and a half is that while West Asia has remained an important source in absolute terms, its share in total remittances has fallen substantially. According to a 2010 study by the Reserve Bank of India, region-wise, the Gulf Countries accounted for 31 per cent of the total remittances to India in 2008-09, followed by North America (29 per cent) and Europe (20 per cent). The latter two accounted for nearly half the total. This shift in the sources of remittances was partly the result of the impact that the software services export boom had on the nature of Indian migration to the United States and Europe. In the United States, for example, the flow of software and IT services workers required to provide onsite services to clients of Indian firms under the HI B visa provision, increased substantially. These workers, who were paid a full salary or a substantial allowance while resident in the US, saved and transferred a significant share of their earnings either to support families at home or retain them as savings in the home country.

Thus, explaining the remittances surge, which has sustained itself through the oil shock years and into the IT export years, is not difficult. The puzzle relates to the question why this surge did not lose steam in the wake of the financial and real economy crises that engulfed both North America and West Asia during 2008. In fact things seem to be getting even better. The World Bank projects that the growth rate of remittance flows to developing countries, which decelerated to 5.3 per cent in 2012, would accelerate to 8.8 per cent during 2013-15 to touch $515 billion in 2015. But nobody is complaining, whether it be in India or eslewhere. Thanks to this resilience, remittances have been and remain a major source of strength for the Indian economy, serving as a buffer for a deteriorating balance of payments. This is a factor that needs to be given more importance when assessing India’s economic performance.

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India tops global remittances listApril 21, 2013