India took the top spot on remittances received in 2017. Remittances increased by about 10% last year over 2016, although this comes on a favourable base considering that remittances had decreased by 9% in 2016. Shouldn’t higher crude oil prices this year lead to a rise in remittances?

We typically receive a large proportion of our remittances from the Gulf region and 2017 was no different. Chart 1 alongside shows the countries from where remittances flowed to us last year. A big chunk coming from the Middle East means that the pattern or flow of remittances closely aligns with crude oil prices. Chart 2 has the details.

Unfortunately, the trend cannot be taken for granted. Nationalist sentiments are on the rise in the Gulf region and this poses a risk to the remittances flow into India, despite strong crude oil prices, said Ritesh Jain, chief investment officer, BNP Paribas Asset Management. “The preference for hiring is shifting towards locals over foreigners and their governments are expanding public spending," added Jain.

According to JM Financial Institutional Securities Ltd, the recent revamp of local hiring schemes/laws by five out of the top seven source countries for remittances is likely to prove a major headwind to increased remittances from higher crude oil prices. The five countries are United Arab Emirates (UAE), Saudi Arabia, Kuwait, Qatar and Oman. These polices are aiming to fill up a required percentage of companies/workforce with their own nationals.

JM Financial reckons that the CAGR (compound annual growth rate) for Indian migrants (over 2017-2010) to UAE and Qatar is already lower than the CAGR over 2000-2010. Further, “In the coming quarters, the impact of recent bans in work visas and exclusion of expatriates in selected jobs/sectors in Saudi Arabia, Kuwait and Oman are likely to negatively impact the remittances from these countries," added JM Financial.

To be sure, stronger economic conditions in advanced economies (especially the US) should offer some support to overall remittances to India. US was the second major contributor in 2017, accounting for 17% share of remittances to India.

Nevertheless, with risks emanating from the Gulf region, the cushion to India’s current account deficit (CAD) from remittances is also at risk now. “For India, CAD is a bigger function of crude oil imports than remittances. And even if remittances were to rise, it will happen with a lag," said BNP Paribas’s Jain. That said, part of the cushion that India’s CAD got from remittances would now go.