Explained | What are remittances?

• India received $120 billion in remittances in 2023, the World Bank said in a report.

• China ($50 billion), the Philippines ($39 billion), and Pakistan ($27 billion) figure in the top five countries list of remittances recipients.

• After a period of strong growth during 2021-2022, officially recorded remittance flows to low and middle-income countries moderated in 2023, reaching an estimated $656 billion, said the report.

• The modest 0.7 per cent growth rate reflects large variances in regional growth, but remittances remained a crucial source of external finance for developing countries in 2023, bolstering the current accounts of several countries grappling with food insecurity and debt issues. 

• In 2023, remittance flows to low and middle-income countries were supported by strong labour markets in the advanced economies, particularly in the United States, which stands as the largest source country for remittances and the primary destination country for migrants. 

• However, reduced remittances from the Gulf Cooperation Council (GCC) countries (where the oil GDP slowed) and the Russian Federation negatively impacted the growth of remittances to the Middle East and North Africa and Europe and Central Asia. 

• In several countries, a divergence between market exchange rates and official rates discouraged remittance flows through official channels.

• In 2023, remittance flows increased most to Latin America and the Caribbean (7.7 per cent), followed by South Asia (5.2 per cent), and East Asia and Pacific (4.8 per cent, excluding China). 

• Looking ahead, remittances to low and middle-income countries are expected to grow at a faster rate of 2.3 per cent in 2024, although this growth will be uneven across regions. 

• Potential downside risks to these projections include weaker than expected economic growth in high-income migrant-hosting countries and volatility in oil prices and currency exchange rates.

• Based on new census data and national statistics, the stock of international migrants is estimated to have been 302 million in 2023. The top destination countries are the United States, Germany, Saudi Arabia, Russia, and the United Kingdom. The largest origin countries are India, Ukraine, China, Mexico, and Venezuela. The largest migration corridor is from Mexico to the United States.

What are remittances?

• The money workers send home to their families from abroad has become a critical part of many economies around the world. These money transfers are called remittances. They have been growing rapidly in the past few years and now represent the largest source of foreign income for many developing economies.

• Remittances have become an important consumption smoothing mechanism for the recipient households and, as such, they form an increasingly important (private) element of global social protection systems.

• Remittances are a vital source of household income for low and middle-income countries. They alleviate poverty, improve nutritional outcomes, and are associated with increased birth weight and higher school enrollment rates for children in disadvantaged households. 

• Studies show that remittances help recipient households to build resilience, for example through financing better housing and to cope with the losses in the aftermath of disasters.

• Remittances also can play an important role in improving a country’s ability to repay debt, due to their large size relative to other sources of foreign exchange, counter-cyclical nature, and indirect contribution to public finances.

• In India, remittances are the second largest major source of external financing after service export, which contribute to narrowing the current account deficit (CAD) and has always been a stable constituent of the balance of payments. The current account deficit (CAD) represents the difference between the total amount of money sent abroad and money received from overseas across the economy.

What the new report says about India?

• Growing at 7.5 per cent, remittance flows to India touched $120 billion in 2023, reflecting the benefits of a deceleration in inflation and strong labour markets in the United States, the largest destination for India’s skilled migrants, and other OECD destinations, as well as positive demand for skilled and less-skilled workers in the GCC countries (which, together, are the second largest destination for Indian migrants).

• Remittance flows to India from the United Arab Emirates, which account for 18 per cent and are the second largest source of India’s remittances after the United States, benefited from the February 2023 agreement.

• The latter established a framework to promote the use of local currencies for cross-border transactions and cooperation for interlinking payment and messaging systems between India and the United Arab Emirates.

• The use of dirhams and rupees in cross-border transactions is instrumental in channelling more remittances through formal channels. 

• In addition to the United Arab Emirates, Saudi Arabia, Kuwait, Oman, and Qatar account for 11 per cent of India’s total remittances.

• The World Bank said remittances to India are forecasted to grow at 3.7 per cent to $124 billion in 2024, and at four per cent to reach $129 billion in 2025.

• India’s efforts to link its Unified Payments Interface (UPI) with source countries such as the United Arab Emirates and Singapore are expected to reduce costs and speed up remittances.

• Most importantly, the diversification of India’s migrant pool between a large share of highly skilled migrants employed mostly in high-income OECD markets and the less-skilled migrants employed in the GCC markets is likely to lend stability to migrants’ remittances in the event of external shocks.