The hidden cost of a Gulf slowdown: India’s remittance lifeline is at risk

Globally, India continues to be the world’s largest recipient of remittances, receiving US$135–138 billion in inward remittances in 2024–25, registering a 14 per cent growth over the previous year.

India’s structural dependence on remittances

Remittances constitute more than 3 per cent of India’s GDP, finance roughly half of its merchandise trade deficit, and contribute to forex reserves. These remittances translate into household consumption, housing investment, school fees, and medical care for families spread across India’s source states, led by Kerala, Uttar Pradesh, Bihar, Tamil Nadu, Telangana, and Punjab.

Beyond the macroeconomic significance of remittances, their most immediate and transformative consequences are experienced at the household level. Remittance-recipient households allocate a larger share of their budget to education and healthcare compared to non-migrant households, generating intergenerational upward mobility and household wellbeing. Remittances reaching the lower income households reduce the depth and incidence of poverty.

In an incomplete welfare state such as India’s, remittances act as a broad form of informal social insurance, compensating for the limited reach of formal welfare mechanisms such as unemployment protection, health insurance and old-age pensions.

These developmental and welfare impacts are simultaneously a structural strength and vulnerability, since the very households whose well-being is most dependent on Gulf remittances are the most exposed to geopolitical and labour market disruption in the ongoing turmoil in West Asia.

The turmoil and its impact

Despite a gradual shift in dominance of India’s remittances from the GCC countries to the advanced economies since the beginning of the current decade, United Arab Emirates (UAE) forms the second largest source of India’s inward remittances, with its share increasing from 18 per cent in 2020-21 to 19.2 per cent in 2023-24. GCC countries accounted for 38 per cent of India’s total remittances in 2023–24. Indian workers in the GCC countries are predominantly employed in construction, logistics, hospitality, and domestic services — sectors that are highly sensitive to geopolitical disruption and economic contractions in host countries.

The World Bank’s Macro Poverty Outlook projects a slowdown in the real GDP growth in the GCC countries to 1.3 per cent in 2026, a significant downgrade from the January projection of 4.4 per cent growth for 2026. The economies of Qatar and Kuwait are predicted to contract by 5.7 per cent and 6.4 per cent respectively, in 2026. The report also predicts long term effects on living standards, productivity, and growth. World Bank’s counterfactual estimates suggest that in the absence of major conflict episodes, income per capita in affected countries could have been about 45 per cent higher on average after seven years, roughly equivalent to 35 years’ worth of progress in the region.

In early March, the World Employment Confederation warned of workforce reductions of up to 15 per cent among firms exposed to energy markets and foreign investment flows, if the conflict were to persist beyond one month. Dubai’s construction and real-estate sector has already started showing signs of slowdown, with a decline in home prices and delays in property completion and handover. Oxford Economics projects that under a protracted conflict scenario, GCC countries could experience a 27 per cent drop in visitors in 2026, costing about $56 billion in tourism spending. Reports from the UAE’s tourism industry indicate that, as of April 2026, tens of thousands of foreign hospitality workers have been sent on indefinite unpaid leave, or subjected to salary reductions ranging from 20 to 50 per cent. Much of the labour market adjustments occur predominantly through quieter mechanisms such as non-renewal of contracts, reduced shifts and prolonged unpaid leave, rather than mass retrenchments. The future of the recent spurt in demand for Indian migrant labour, especially in construction and allied sectors, for Saudi Arabia’s Vision 2030 and the UAE’s infrastructure expansion also remains volatile.

The immediate response of Indian migrant workers has been a sharp increase in precautionary remittance transfers. According to SBI Research, in March 2026, there was an incremental jump of around 30-35 per cent in remittances from West Asia, as a risk-averse response to the fear of worsening conflict and potential evacuations. However, this real but transitional phase should not mislead policymakers and markets into underestimating the medium- to long-term structural threat.

The structurally damaging phase occurs when conflict disrupts the GCC labour market. Forced repatriation of even a fraction of the Gulf workforce would create multi-dimensional domestic stress. The workers most likely to be displaced first — construction labourers, domestic workers, low-skilled service sector employees — are precisely those with the fewest formal skills, the lowest savings, and the least capacity to find equivalent alternative employment in India’s formal sector. For their families, it is the simultaneous removal of the household’s income, its credit substitute, its health insurance, and the investment stream on which its children’s education and home construction depend.

Policy implications

The macroeconomic consequences of a widening current account deficit, intensified pressure on foreign exchange reserves and the inflationary consequences of rising crude oil prices are well documented, and will attract policy attention. Less documented, and more urgent for welfare, are the household-level consequences. The Skill India International programme’s bilateral agreements with Germany, Italy, Japan, and the UK are one major step in this direction, but the pace and scale of these partnerships must be significantly stepped up. Parallel to migration diversification, efforts aimed at wider social protection and human capital investment, a revamping of the domestic industrial policy that also enables domestic formal employment creation and facilitating the reintegration of return migrants through reskilling and financial support mechanisms are essential to building long-term economic resilience and reducing the vulnerability of migrant households to external shocks.

The writer is an associate professor of Economics at the Vellore Institute of Technology (VIT), Chennai