The Hindu Business Line : Dollar deluge

IT IS POURING good news about the Indian economy. After an 8 per cent GDP growth for the second quarter, just behind China's, comes the news that this country has had the biggest inflow of capital from its overseas workers. India received a record $21.7 billion by way of remittances in 2004, followed by China and then Mexico. According to the World Bank's Global Economic Prospects for 2006, remittances to the South Asia region were of a high order in some countries, those to Sri Lanka for instance, outstripping exports of tea, its primary product. In Nepal, remittances accounted for nearly 12 per cent of its GDP, Pakistan received $3.9 billion and Bangladesh $3.4 billion on this account. With its record inflow India alone accounts for nearly 20 per cent of remittances world-wide. One aspect that needs to be noted is that nearly 45 per cent of the inflows represents `south-south' inflows. In Nepal, for instance, much of the remittances would have come its citizens working in India. This is not to underestimate the magnitude of the flows; in dollar terms the surge in capital repatriation represents rising income levels Equally they represent an expansion of the inter-regional labour market which can only benefit `south-south' economic ties.

Two points need to be noted before policy-makers begin to pat themselves on the back for yet another prize-winning performance by the economy. One, the level of remittances, noted by the World Bank report, does not represent the actual remittances or savings of the country's exportable labour force. As the report itself says, there are informal channels through which capital makes its way into the recipient country — a form of transmission that could inflate the recorded figures by at least 50 per cent. Informal remittances have been a recurring problem in developing countries such as India especially under stringent foreign exchange restrictions. With the loosening of those controls, the problem of under-reporting of foreign incomes is mitigated somewhat but clearly the banking system must develop its outreach and innovate to attract low-value income earners.

The second, more substantive, issue is the impact of these remittances on the economy. On the external sector's current account balance, the effect of the rising inflows has been positive, to a degree. The RBI observes, rather dourly, that even with an increase in invisible earnings, of which remittances are a crucial part, the current account slipped into a deficit after three years because of a merchandise trade deficit. Higher crude oil prices and a strong domestic demand for imports pushed up the import bill contributing to a trade deficit that was 5 per cent of GDP in 2004-05 after remaining stable at around 3 per cent during 1990-2004. The robust growth in `invisibles' receipts contained the current account deficit at 0.9 per cent of GDP.

The productive economy, however, was not so fortunate. Despite beating China in remittances, the fact remains that a greater amount of the remitted capital finds its way as investments in China whereas in India, it channels into consumption. So which country wins?

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