“India’s current account deficit (CAD) excluding remittances would have been a high $101 billion (3.5 per cent of GDP) vs $25 billion (0.9 per cent of GDP) with transfers in FY20,” UBS wrote in its report.
Gulf countries constitute roughly 62 per cent of India’s remittances. The recent sharp fall in global crude oil prices will affect Gulf Cooperation Council (GCC) growth, while the weak US economic growth would also adversely impact employment there and therefore, the remittance to India. US and Canada account for nearly 20 per cent of remittances to India.
“According to our analysis, every 10 per cent decrease in oil prices, reduces remittances to India by 7 per cent in the long-run,” UBS economists Tanvee Gupta Jain and Rohit Arora wrote in their report.
The fall in remittances will hit different states differently.
“The decline in foreign remittances because of a meltdown in global economy including Middle East is likely to significantly impact southern states like Kerala. This could also result in lower bank deposits in such states, and that would bring down household savings,” said Soumyakanti Ghosh, Group Chief Economic Advisor at State Bank of India Group.
It is not only foreign remittances that are crucial in the economic linkages. there are two aspects to remittances, one that comes from abroad, and another that flows from urban areas to rural and help shape the rural economy. The migration back to rural areas from urban has hit this to a great extent and the impact could be far reaching.
The Prime Minister Jan Dhan Yojana (PMJDY) accounts have been the vehicle for inward remittances by migrant labours, in the last couple of years as more formalisation of the economy has gained momentum. “However, in the current situation, with the raging pandemic the remittances are likely to significantly decline as migrant labourers has returned back to their original destination. This is likely to be a negative impulse for the banking system in the current fiscal,” Ghosh said.
FINO Payments Bank, the key player in the urban to rural remittances business in the country, says the situation is improving, but it will take at least another three to six months for the remittances to reach its pre-covid level.
“While, rural households too are beneficiaries of international remittances, it is the urban to rural remittance that drives rural economy. We experienced a hit of around 80 per cent in the initial days of lockdown as migrant workers lost jobs or were without salaries. From May, remittances have shown recovery and currently we are at 60 per cent of the pre-Covid levels, where we facilitated around Rs 4,000-Rs 4,500 crores a month,” said Ashish Ahuja, Chief Operating Officer of Fino.
Normalisation of remittances would largely depend on the MSME sector bouncing back and large scale infrastructure projects taking off as these two are the biggest employers of this set of population, according to Ahuja. An interesting trend seen by Fino is that some “reverse remittance happening from rural to urban locations,” said Ahuja, adding this could be a temporary phenomenon.
Intra state remittances are meanwhile gaining ground. Migrants who went back to their home states and have commenced looking for employment in enterprises and MSMEs closer to their homes. “Some have even taken up entrepreneurship opportunity with Fino as banking points,” Ahuja said.