India has been the largest recipient of international remittances since 2008. Indians living overseas sent $83 billion worth of remittances in 2020. Despite the COVID-19 situation, the state of the remittance economy in India has shown remarkable resilience. While there are many reasons to rejoice, there are also areas of improvement. Here is a quick look at both aspects of this situation.
Resilience in the face of coronavirus
Due to the COVID-19 outbreak, the number of outbound migrant workers declined. Despite this, remittance volumes to India remained more or less constant. A World Bank report released in May 2021 attributes this situation to multiple reasons. First, there was a partial shift from informal to formal remittance channels. This was driven by necessity, since restrictions on international travel made it difficult for migrants to “hand carry” the funds. Next, NRIs made sure to send money to India in larger amounts than usual to support their families through the crisis. Finally, large numbers of returning migrants repatriated their overseas savings as bulk transfers.
The top 5 remittance recipient countries in 2020 were India, China, Mexico, the Philippines, and Egypt. Similar trends were recorded in many recipient countries. Migrants were determined to help their families in time of need, even if it meant cutting consumption and drawing on savings. Fiscal stimulus in host countries caused economic activity to decline less than forecasted, and recover quickly. Another important consideration is validity. The availability of data on remittances sent via informal channels is limited. The true size of remittances includes both formal and informal flows. The figures being reported may well suffer from a missing variable bias.
Inflows from the GCC
Remittances to India since COVID-19 showed strong regional variations. Weak oil prices caused remittances from the GCC economies to decline sharply. A staggering number of Indian migrant workers employed in the GCC countries lost their jobs. The southern Indian state of Kerala recorded the loss of 1.2 million migrant worker jobs in 2020. This represented the loss of nearly 30% of the state’s income. Migrant jobs in the GCC fell by 70%. The workers who retained their jobs were also impacted by the crisis. COVID-19 recovery measures in host countries involved widespread wage reductions and partial unemployment in the form of reduced hours.
Outlook for the near future
The World Bank forecasts that in 2021 and 2022, developed economies will record a strong recovery. Migrant workers’ jobs and incomes will be gradually restored. Remittance flows to low and middle income countries (LMICs) will stabilize. In India, the overall decline in remittances in 2020 was merely 0.2%. Much of this decline was owed to reduced inflows from the GCC. This was offset by greater inflows from the US, EU, and other regions. These trends prove that skill-based migration holds a much better promise of recovery as compared to labor-centric and unskilled work.
Meanwhile the use of digital and formal money transfer mechanisms is growing. Reductions in transaction costs and key changes in the official policy on remittances will help. For example, Bangladesh and Pakistan introduced new remittance tax incentives in 2019 and 2020 respectively. It may be worthwhile considering similar measures in the Indian context.
Longer term solutions
Many new opportunities exist in the potential for collaborations between banks, Fintechs, conglomerates, MTOs, and governments. Specifically in the domain of remittances, it is a good time to seek interoperability across nations. This is possible through commonalities in banking systems, platforms, and practices. This is exactly what India’s apex bank is planning. In a press release from November 2020, the Reserve Bank of India (RBI) announced that it was planning to setup an innovation hub. Its aim will be to explore technologies and initiatives to simplify cross-border payments, as well as make to make them more accessible and affordable. The National Payments Corporation of India (NPCI) has created a subsidiary called NPCI International Payments Limited (NIPL). It will enable the usage of RuPay and UPI in other countries, and increase their global presence and acceptance. RuPay and UPI are proven payment systems with millions of users and billions of monthly transactions.
South Asia has the lowest average remittance costs of any world region at 4.88% as of Q4 2020. However, it remains higher than the global goal of <3%. PWC has said that going international with the payments standards and solutions developed in India is worthwhile. The adoption of IndiaStack and payments instruments by foreign countries has much potential. It can make remittances and real-time settlements a lot faster and cheaper.