Published on 8/04/2019 9:01:30 AM | Source: HT Media

Remittances to India are exposed to risks of further moderation

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Indians living abroad are sending less money back home. However, they haven’t become less patriotic—it’s more a case of a drop in their earnings because of external factors that are at play.

Lower earnings in Gulf countries, as a result of a fall in crude oil prices, have weighed on remittances. That, coupled with a feared slowdown in the global economy, especially in the US, has raised the risk of a further fall in remittances.

“As a large part of the remittances originates from the Gulf countries, it is not surprising that the direction of these flows are partly influenced by global oil price trends. Unlike the oil import bill, impact on remittances likely show with a lag. Looking ahead, flows are likely to moderate as a cyclical slowdown sets in on the global front," Radhika Rao, senior vice-president and economist(group research) at DBS Bank Ltd, said in an email on Friday.

“Word Bank data shows that Gulf Cooperation Council member states continue to account for the bulk of these flows (56% share in total). However, in recent times, North America (the US and Canada) has become the second-largest source of remittances with a 21% share. For remittances to stay healthy, both oil prices and the global economy have to show improvement simultaneously," said Tanvee Gupta Jain, chief India economist at UBS Securities India Pvt. Ltd.

Remittances slowed to $17 billion in the December quarter of fiscal year 2019 (FY19) from $19.5 billion in the September quarter. Remittances as a percentage of gross domestic product (GDP) are estimated at 2.7% in FY19 by PhillipCapital (India) Pvt. Ltd. However, it is poised to decline to 2.3% and 2% in FY20 and FY21, respectively, said the brokerage firm in a report released on 3 April.

A surge in crude oil prices in mid-2018 resulted in higher remittances in FY19. However, that spike was unusual and oil prices have corrected since. There are signs of a recovery but the trend is downward, said analysts.

As for global growth, the International Monetary Fund (IMF) has trimmed 2019 GDP forecast from 3.7% to 3.4% in January. IMF chief Christine Lagarde has signalled further cuts when the fund releases new forecasts on 9 April.

“For now, given the feared slowdown in the global economy, some moderation in remittances to India cannot be ruled out," said Jain.

This double whammy would take its toll on remittances. Thus, other elements of India’s trade balance such as export of software services would need to compensate for faltering remittances. However, IT services exports are also dependent on the state of the global economy and expectations here need to be curbed.

“Remittances have limited the extent of widening in India’s current account deficit, with the quantum equal to the service export earnings in some of the years. Better export earnings can compensate a slowdown in remittances, but will be unable to pick the entire slack," said Rao.