Slowdown in remittances is bad news for economy

Remittances growth is muted due to "structural" reasons which will hamper consumption demand locally, a report said on Thursday.

"...the muted external remittances growth is more of a structural issue than transitory," India Ratings and Research said in its note.

India has been the largest recipient of remittances from its diaspora spread all across the world and received over $70 billion inflows last year.

The agency argued that flows had started to moderate even before the COVID-19 pandemic outbreak, pointing out that as a percentage of gross disposable income, the share of remittances fell to 2.5 per cent in FY19 as against 3.5 per cent in FY10.

Foreign currency non-resident (FCNR) segment has witnessed a year-on-year fall in deposits, whereas overall NRI (non-resident Indians) accounts have reported an increase, it said, adding that South-based Federal Bank and South Indian Bank have reported subdued growth in NRI deposits.

Key risk for banks will emerge only if the fall in deposits continues amid an increase in withdrawals due to the factors induced by pandemic.

At the same time, banks will be able to manage this risk better with the help of improved domestic deposits amid muted credit growth, it said.

The impact of this would largely be restricted to the aggregate consumption level as the buoyancy in foreign capital flows would compensate the requirement of capital, it noted.

Income generation abroad by the diaspora is the biggest source of remittances, and the Gulf countries are the largest source of fund inflows, it said, pointing out to World Bank data which says over half of the 16 million diaspora is in the Middle East.

"The falling oil prices and recessionary pressures exacerbated due to the COVID-19 outbreak have led to job losses and salary cuts globally," it said, adding remittances from the Gulf region will be pressured due to COVID-19 related factors coupled with falling oil prices.

Various empirical studies have suggested that remittances are an important driver of a smooth consumption cycle, have a positive impact on household savings and act as a consumption booster.

Therefore, the pandemic-led slowdown in consumption is likely to get exacerbated by the muted remittance flows, it added.

Photograph: Dado Ruvic/Reuters