Home > Markets > Mark To Market > Covid-19 pandemic poses a threat to India’s steady flow of remittances

Remittances from non-resident Indians (NRIs) have been India’s bulwark in financing its current account deficit (CAD), even in times of a crisis. The 34% growth in remittances to the country in 2008, when the financial crisis broke, reflects this reliability.

But the outbreak of covid-19 and the various degrees of lockdowns across the globe is threatening this flow now. World Bank estimates that globally, remittances will shrink by 20% in 2020. India, the biggest receiver of remittances, could witness a 23% slump.

The bulk of the remittances are towards the upkeep of the family back home, while some are towards financial investment. In 2019, remittances were estimated to have totalled $83.1 billion, or 2.8% of gross domestic product, according to the World Bank.

Under the covid cloud.
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Under the covid cloud.

For India, the threat to remittances is twofold. More than 50% of the remittances come from the Middle East. These economies are built on oil revenue and the recent dive in crude oil prices doesn’t bode well for them. Indeed, this increases the risk of layoffs, and immigrants are more vulnerable.

Economists said the fall in crude oil prices has a negative impact on remittances. “In Asia, remittances are likely to slow from developed economies (due to the economic slump) and the Middle East (falling oil prices)," said economists at Nomura Financial Advisory and Securities (India) Pvt. Ltd.

To be sure, the positive side of falling crude prices is a decline in the country’s oil import bill. This means that CAD won’t add up to much for financing this time around. The average price of India’s crude basket was down by 39% in March, and crude oil prices have continued to decline. The salutary effects on the trade deficit are clear.

Even so, the odds of it being easy to finance CAD appear few. Foreign portfolio flows have so far been in the negative territory due to outflows from domestic equity and bond markets. Foreign direct investment is also expected to get adversely impacted from the covid-19 outbreak.

At such a time, it is important that the most reliable and steady source of inflows, remittances, are robust. “The fall reflects the adverse impact on employment and wages of migrant workers and, unlike the past crisis, remittances may not provide counter-cyclical support this time around," added the analysts at Nomura.

Another segment at the receiving end of the remittance impact could be NRI deposits of banks. Since Indians will be earning less or perhaps stop earning, the flow towards these deposits could diminish. By extension, this could impact the deposit growth of banks, especially for those that rely on NRI deposits.

In the coming months, slowdown in remittances could emerge as a key pain point for the Indian economy.

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