N Chandra Mohan: 'Remitting' economic development

The sustainability of remittances surging into India is questionable

While “hot” capital inflows, especially portfolio investments surging into India’s economy, have triggered serious concerns of late, remittances or private transfers from the vast diaspora are still welcome. For starters, the latter inflows are 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,” argues Dilip Ratha, lead economist and manager of the migration and remittances team at the World Bank.

Remittances have been estimated at $52 billion in 2009-10, according to the Reserve Bank of India. During the first quarter of 2010-11, remittance inflows of $13 billion exceeded the net inflows of foreign direct and portfolio investments into the Indian economy. In sharp contrast to the fair-weather portfolio investments, private transfers by Indians abroad are also more likely to be invested in the home country despite adverse economic circumstances. Moreover, research has established that remittances augment savings and investments of recipient households and help reduce poverty.

Though remittance flows are expected to keep rising, doubts are being raised about their sustainability in the future. After all, the west-Asian oil-financed construction boom is over and there is less need for unskilled Indian workers who built the infrastructure. The process of recovery from the global recession in the Gulf countries is also far from complete. Moreover, given the growing backlash against migrants in the developed world, how much longer will the migration of Indian teachers, nurses and software techies to such countries sustain private transfers?

In this context, Kerala’s experience is relevant since the state vitally depends on private transfers, which amount to one-fifth of its net state domestic product. The Thiruvananthapuram-based Centre for Development Studies (CDS) has been doing interesting work on emigration and the impact of remittances on Kerala’s economy. CDS has, in fact, completed four large-scale surveys on migration — in 1998, 2003, 2007 and 2008. Subsequently, a Return Migration Survey was done in 2009 to study the pre-recession (October-December 2008) and recession (June-August 2009) experiences of emigrants from that state.

In recent CDS working papers by Professors K C Zachariah, S Irudaya Rajan and D Narayana, household cash remittances received by sample households showed a modest overall increase of seven per cent despite the recession in 2009. Although a recession may be expected to result in a decrease in remittances, the latter can paradoxically increase when emigrants who lose their jobs return home permanently with their savings accumulated in more prosperous times. Also, the cash value of gifts received in 2009 was more or less the same as in 2008.

The good news about Kerala’s remittances, however, conceals sharp variations since some households experienced large increases in remittances while others suffered large decreases. Around six per cent of the households that received remittances in 2008 did not receive any remittances during 2009. The number of households that received smaller amounts of remittances in 2009 vis-a-vis 2008 is also substantial. Nevertheless, the overall rise appears plausible in the light of higher remittances during the recession period in south Asian countries like Sri Lanka, Pakistan and Nepal.

Remittances have increased since the number of Keralite emigrants who returned home after losing their jobs due to the recession in the Gulf was much less than popularly feared. The CDS working papers show that around 54,000 emigrants lost their jobs in 2008. But since 32,000 unemployed emigrants in that year subsequently became employed, the net job loss was only 21,000. The number of those who have returned home due to the recession also is not more than 63,000. Whether it is 54,000 or 63,000, these numbers are marginal against the stock of 2.2 million emigrants from that state to the Gulf in 2008.

A major reason these job loss or return emigration figures are less alarming is that Keralite emigrants incur huge costs, including borrowings, to work in the Gulf. So, even when they have lost their jobs, “they would prefer not to return home fearing inability to repay the debt already contracted there. They would rather accept any job at a lower wage and try to continue to send home remittances to repay their loans even during a crisis in the destination country,” argue Narayana and Rajan. Such emigrants also rely on social networks to provide temporary support in the event of job loss.

The number of Keralites who have lost jobs in the Gulf and have not returned home has been estimated at 39,396 persons or only 1.8 per cent of the emigrant stock in 2008. Interestingly, such adverse developments have not prevented more people from the state from heading to the Gulf. Around eight per cent of the return emigrants of 2008 have re-emigrated. Kerala also sent 142,000 new emigrants during the recession. But as the recovery from the recession in the Gulf is somewhat fragile, the big question is how much longer will the good times on the remittances front last?