Red flag rising for India’s finances as remittances shrink

Bloomberg

India’s most reliable source of foreign funding is under threat.
Remittances fell to $15.8 billion last quarter, the lowest since April-June 2011 and a 9.4 percent drop from a year earlier, as the global slowdown and slumping oil prices reduce demand for foreign workers. Indians working abroad — from construction labourers in Dubai to Silicon Valley engineers — send home the most money in the world, helping to pay for imports of fuel and electronics.
The drop in cash flows is a ‘red flag’ even as lower oil costs help shrink the current-account deficit for now, said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. While India isn’t dependent on remittances, a further erosion to one of the most stable components of the current account would be “a headache,” he said. India relies on remittances and earnings from services exports to help bridge a trade shortfall and support its currency. Now both are showing signs of weakness, adding pressure on Prime Minister Narendra Modi to create employment at home as overseas companies such as pipeline-repair firm T.D. Williamson Inc. cut jobs.
Indians working overseas remitted $72.2 billion in 2015, according to World Bank estimates, almost double what the nation attracted through foreign direct investment and about seven times more than inflows into stocks and bonds. Workers in the Gulf region accounted for more than half of funds sent home in 2014, while labourers in the UAE sent the single biggest chunk of $13 billion, according to the latest available breakdown provided by the World Bank.
Those workers in the Middle East are particularly under pressure as a 62 percent plunge in crude costs over the past two years compels companies to shelve expansion plans. TD Williamson, based in Oklahoma, cut an unspecified number of jobs in Dubai last month, the latest to downsize after Etihad Rail eliminated about 30 percent of its workforce and National Bank of Ras Al-Khaimah PSC cut about 250 staff.
The decline in remittances to India is “perhaps the first sign of an oil-induced fall in Middle East remittances,” economists at Citigroup Inc., led by Samiran Chakraborty, wrote in a March 22 report. They predict the rupee will weaken toward a record low in the year starting April 1 and India’s current-account deficit will widen to 1.3 percent of gross domestic product instead of 1.1 percent forecast earlier.
Remittances are important for India because they go mostly to poor families to pay for food, school and medical expenses, according to a central bank report. Federal Bank Ltd., based in the southern state of Kerala where almost 90 percent of migrants go work in the Gulf, has conducted stress tests assuming a 25 percent drop in remittances. While there are no signs of stress for now, the bank is “sensitising” itself to a situation where remittances keep falling for three or four quarters, Shyam Srinivasan, Federal Bank’s chief executive, said in a January call with analysts. Even so, the overall impact will probably be limited. Remittances more than tripled in the decade through 2015.
India has about 14 million migrants overseas, and in 2011 sent abroad the world’s largest stock of higher educated citizens, according to the World Bank.