India to receive record remittances but experts worry CAD will still widen

India is likely to receive $100 billion in remittances this calendar year but experts say the record inflow may not be able to tame the widening current account deficit (CAD).

According to the latest World Bank report titled Migration and Development Brief, India’s remittances are expected to reach the $100-billion milestone in 2022 due to wage hikes and a strong labour market in the US and other OECD countries. This represents a 11.8 per cent growth over $89.4 billion received by India in 2021. In 2020, India received $83.1 billion in remittances.

For CAD, net remittances, which are the balance of inflows and outflows, hold relevance. In 2021, outward remittances from India constituted $8.1 billion, constituting 0.3 per cent of its gross domestic product (GDP), according to the report.

Assuming that a similar proportion of GDP would flow out as remittances in 2022, the figure would come to around $10 billion. This means India would receive $90 billion as remittances on a net basis in the year.

Importance of high remittances could also be gauged from the fact that foreign portfolio investors (FPIs) withdrew $18 billion from the markets on a net basis till December 16 this year. Figures for foreign direct investments (FDIs) are available on the financial year basis. About $20.2 billion FDI came in on a net basis in the first half of FY23, almost flat compared to the corresponding period of FY22.

Remittances are part of the current account, while FPI and FDI are capital accounts in the balance of payments.

Despite high net remittances, pressure from CAD would not wane for India. Experts say CAD will widen further in the second half of the year.

India’s CAD stood at $13.4 billion in the first quarter of 2022. This constituted 1.5 per cent of the GDP. The deficit widened to $23.9 billion in the second quarter. This accounted for 2.8 per cent of the GDP.

Icra chief economist Aditi Nayar pegged it at $32 billion or 3.9 per cent of the GDP in the third quarter and $28-30 billion or 3.4-3.6 per cent of the GDP in the fourth quarter.

Of $90 billion remittances that India is expected to receive in 2022, only $27.4 billion has come in the first half of the year. This means an overwhelming $62.6 billion must come in the second half to reach the target.

But the CAD has been higher in the third and fourth quarter. 

Nayar attributed this to the high trade deficit. Trade deficit stood at $84.8 billion in the third quarter of this calendar year against $70.6 billion in the second quarter.

"Based on the higher growth in merchandise imports vis-a-vis exports in Q3, 2022, and widening of the associated trade deficit, we expect India’s current account deficit to enlarge to an all-time high of $32 billion in that quarter, from $23.9 billion in Q2. The sharper rise in imports has been driven by both higher commodity prices as well as robust domestic demand. With some moderation in commodity prices, we expect the size of the CAD to ease in Q4, even as a weakening outlook for global demand poses a challenge to exports," Nayar said.

According to the World Bank report, remittances have benefitted from a gradual structural shift in Indian migrants’ key destinations from largely low-skilled, informal employment in the Gulf Cooperation Council (GCC) countries to high-skilled jobs in high income countries such as the US, the UK, and East Asian countries such as Singapore, Japan, Australia, New Zealand.

Between 2016–17 and 2020–21, the share of remittances from the US, UK, and Singapore increased from 26 per cent to over 36 per cent, while the share from the five GCC countries (Saudi Arabia, UAE, Kuwait, Oman, and Qatar) dropped from 54 to 28 per cent, the report said citing an RBI study.

With a share of 23 per cent of total remittances, the US surpassed the UAE as the top source country in 2020-21. About 20 per cent of India’s emigrants are in the US and the UK.

The milestone in remittances to India could be gauged from the fact that Mexico would come next but would be way behind with inflow of $60 billion in 2022.

However, remittances do not constitute much as a proportion of GDP. These would account for just 2.9 per cent of GDP in India in 2022.