In 2020, the World Bank and International Monetary Fund (IMF) predicted that remittances would fall by 20%. Thankfully, remittances defied that prognostication and remained buoyant. Experts rushed to explain that remittances remained buoyant because migrant workers returned home, due to Covid.
Professor, Social Policy, Columbia University, USCome rain or thunder, recession or pandemic, remittances are now a more dependable source of funds for developing countries than foreign aid or foreign direct investment (FDI). Donald Trump may have passed more than 400 legislations to restrict immigration to the US, the EU may be restricting large-scale entry of non-Europeans, Covid may have brought international migration to a trickle. Yet, flows of remittances from international migrants to their families back home have increased during the pandemic.
In 2020, the World Bank and International Monetary Fund (IMF) predicted that remittances would fall by 20%. Thankfully, remittances defied that prognostication and remained buoyant. Experts rushed to explain that remittances remained buoyant because migrant workers returned home, due to Covid, remitting their savings and other assets. But this would not last long, they warned.
The World Bank predicted that remittances would fall by 8% in 2021. And, once again, it was proved wrong. In 2021, remittances are projected to increase by 7.3% to $589 billion (₹43.95 lakh crore), more than the combined flows of FDI and Official Development Assistance (ODA) to developing countries, according to the World Bank.
So, what accounts for this buoyancy, which is at odds with trends in major economic markers that determine these flows? Numbers suggest a rise in remittance per migrant. It could simply be altruism – migrants sending more money to provide for families back home. Developing economies are more adversely hit by the pandemic than rich economies. Governments in the rich world also provided substantial stimulus packages to their residents so that they could withstand the lockdowns and business closures deemed essential at that time to contain the virus. Stimulus checks softened the blow of the pandemic on residents of the rich world, including some immigrants. With remittances, some of the stimulus money got transferred to the families of migrants back home.
Some of the increase may also be due to more transfers flowing through formal channels. While there are no estimates, in any normal year, a substantial portion of remittances flows through informal channels, mostly sent through family members or friends returning home. Covid substantially lowered cross-border mobility and broke down these informal channels. Migrants, instead, had to use the formal channels. At least a part of the increase could also be due to increased incentivisation (for instance, by the Nepalese and Pakistani governments) and efforts to lower remittance costs by home-country governments.
India is the single-largest recipient of remittances. The inward flow of remittances in 2021, at $87 billion (₹6.49 lakh crore), would be almost 5% higher than in 2019. The past year saw a massive shift in sources of inward remittance to India. The US has become the biggest source, accounting for 20% of the total remittances. In 2021, Indians in the US remitted $17.4 billion (₹1.3 lakh crore), up from $12.7 billion (₹94,774 crore) two years ago. Excluding the US, overall inward remittances to India registered a small decline. To some extent, this shift has likely increased the proportion of remittances coming through formal channels.
Indians in the US are generally from economically well-off families who suffered a softer economic blow from the pandemic than most Indians. Thus, there is more to the projected rise in remittances to India in 2021 than just altruism. Wealthy Indian Americans have become wealthier from the stock market boom. They may be sharing some of their wealth with family back home, or simply using some of the increased wealth to acquire assets in India.
There are three additional factors: software services exports have been rising; Trump’s travel bans, enacted during Covid, to bar entry of foreign nationals (and their dependents) on new H-1B, L-1 and J-1 visas, have expired; and oil prices have been rising. Traditionally, remittances to India have been highly correlated with energy prices. Thus, some of the increase is linked to the rise in oil prices that increased demand for migrant workers to the Gulf countries.
With the ban on H-1B, L-1 and J-1 visas lifted in March 2021, skills migration is growing, raising remittances. Software services exports have accounted for a substantial proportion of the growth in inward flow of remittances to India. Their revival could explain some of the increase even though the proportion of direct on-site services has been much less than before. According to the RBI Survey on Computer Software and Information Technology-Enabled Services Exports 2020-21 (bit.ly/30TSyjF), the share of off-site mode of exports of software services was 87.1% in 2020-21.
But this may change. The US tech sector is experiencing severe skill shortages and wages are rising. This could raise demand for on-site software services from Indian software workers.