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Saturday, September 26, 2020

‘Remittances to India likely to decline 25%; fall in oil prices to hit flow from Gulf region’

“Based on an analysis, we expect private transfers to slow to $55-60 billion in FY21 on a year-on-year basis,” Swiss banking group UBS said.

By: ENS Economic Bureau | Mumbai | Updated: July 27, 2020 5:22:52 am
India is the largest recipient of remittances (in value terms) in the worId and received nearly billion of flows (2.7 per cent of GDP) in FY20. (File)

Remittances to India are estimated to decline sharply by about 25 per cent in FY2021 amid the economic crisis induced by the COVID-19 pandemic and shutdown, according to a global banking group. “Based on an analysis, we expect private transfers to slow to $55-60 billion in FY21 on a year-on-year basis,” Swiss banking group UBS said.

India is the largest recipient of remittances (in value terms) in the worId and received nearly $76 billion of flows (2.7 per cent of GDP) in FY20. These flows help boost household income, support private consumption and add stability to current account balance (CAB), UBS said in a report.

Many Indians working in the Gulf region had recently lost jobs and more layoffs are in the offing as lockdown and the decline in global trade are set to hit the global economic growth. Kerala — which is one of the largest recipients of remittances in India — is expected to witness a decline in remittances. The projected fall, which would be the sharpest decline in recent history, is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country.

India’s current account deficit (CAD), excluding remittances, would have been a high $101 billion (3.5 per cent of GDP) as against $25 billion (0.9 per cent of GDP) with transfers in FY20, the report said. “Going forward, the recent sharp fall in global crude oil prices will affect Gulf Cooperation Council (GCC) growth (62 per cent share in remittance inflows).”

According to the UBS analysis, every 10 per cent decrease in oil prices reduces remittances to India by 7 per cent in the long run. Similarly, weak economic outlook of the United States would adversely affect employment and/or incomes of migrant workers and hence remittance flows to India.

India’s forex reserves have risen to the fifth largest in the world ($516 billion), and seem in reasonable shape, based on a reserve adequacy metric to withstand volatility due to global risk aversion. Forex reserves cover 86 per cent of external debt as of FY20, up from 68 per cent in FY14 but below 138 per cent as of FY08 (the year before the credit crisis). Import cover for reserves is 15 months, much better than 7 months in FY13 & 14.4 months in FY08.

As per a recent World Bank report, remittances to low and middle-income countries (LMICs) are projected to decline by 19.7 per cent to $445 billion, representing a loss of a crucial financing lifeline for many vulnerable households.

Studies show that remittances alleviate poverty in LMICs, improve nutritional outcomes, are associated with higher spending on education, and reduce child labour in disadvantaged households. A fall in remittances affect families’ ability to spend on these areas as more of their finances will be directed to solve food shortages and immediate livelihoods needs.

“For the first time since FY04, we estimate the economy to register a small surplus in the CAB of 0.4 per cent of GDP in FY21. The surplus should be led by weak domestic demand and lower oil prices leading to a collapse in imports rather than a strong export recovery. We don’t expect the surplus CAB trend to be sustained for long,” the report said.

Rising crude prices, gradual recovery in domestic demand and only a modest recovery in exports could reverse the trend. “We estimate CAB to swing to a deficit of 0.3 per cent of GDP in FY22, though still lower than the sustainable range on below trend GDP growth,” it added.

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