ET in the classroom: Why remittances are important for India

India's robust remittance inflows were always taken for granted. But with the current-account deficit touching a record on the back of rising imports and dividend and interest outflows, these private transfers are turning to be crucial for India's balance of payments.

What are remittances?

These are payments sent by Indians abroad to relatives back home. Remittances are essentially meant for maintenance of the recipient household, but a recent RBI survey shows that a substantial part of these inflows get invested in stocks, bonds, fixed deposits and and real estate. From a balance-of-payments perspective, remittances are permanent foreign currency inflows and help finance the current account, unlike NRI deposits which are repatriable.

How much remittances does India receive?

India is the largest recipient of worker remittances in the world. In financial year 2012, it received $66 billion, according to the RBI. Remittances form about 22-23 % of the country’s foreign exchange reserves.

Why have they been flat?

One reason is the general slowdown in the global economy resulting in slower worker migration as well as lower incomes. But unlike many of its neighbours (Pakistan, Bangladesh and Nepal), India does not rely heavily on remittances to fund its growth.

Why is this development worrisome?

Remittances are an important source of foreign exchange in India's balance of payments. And this slowdown in remittances, perceived to be a more reliable and stable source of inflows, has impacted the current account deficit, which has touched a record 6.7% of the GDP during the quarter ended December 2012.