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Charts & Analysis

Chart Of The Day: How Much Do Foreign Remittances Fund Our Imports?

India gets a lot of money from remittances abroad mostly from expats who transfer money for families back home. How much, really, is it?

Foreign Remittances (Inward)

(Source:  IMF)

More than $53 Billion dollars was sent home last year (2010). The money helps fund our trade deficit (we import more than we export). But how much? As a percentage of the trade balance (data from RBI), and using the rupee dollar rates (again from RBI) we have an interesting chart:

Remittances Percent of Trade Balance

More than 50% of our trade balance was funded through remittances (which are a part of inflows from abroad, the others being exports and FDI/FII investments). This is the highest since 2004, but the 90s were much more, at above 100% most of the time. The 1993 spike was when we had to beg for any money that was available.

Now consider: If the developed economies hurt, then people there will make less money, including our dear expats there. What happens when remittances slow down?

  • Praveen says:

    When developing economies go slow., here too their outsourcing contracts will become less thereby starting of layoffs here too. Thereby the demand for oil(cars) etc will mitigate thereby decreasing our import bill too.

  • Nerus says:

    Most remittances are from the Gulf – not from developed countries.

  • VRT says:

    lot of money remitted that way is black money circling ofcourse…

  • kazaan says:

    How is it that when we had remittances at 3.3x our deficit in 1993, we begged for money?

  • Nerus says:

    To answer Kazaan’s question: We begged because remittances at 3.3 x deficit is irrelevant. If remittances were 3.3 x IMPORTS, then that would have been relevant, and we wouldn’t have had to beg.
    In summary, the deficit existed after taking remittances into account.

  • manish says:

    What is Expat? plz let me know..

  • IndianHayek says:

    There we go. Just when are you people going to realize any trade inherently is balanced. Deficits exist only in books. Trade deficit is not some kind of “debt” we owe. A floating currency exchange & Capital flows (FDI, FII) take care of the deficit. What do you think Chinese & Americans we export from do with Rupees they get?
    Remittances play an important role in India’s economic growth in terms of freeing up domestic resources for investment. Remittances don’t pay for imports. If remittances for some reason grind down to zero next year, indian currency should get devalued proportionately. That is all. India doesn’t owe anyone anything. Please stop spreading fallacies.
    Some of your posts suggest you perhaps support free markets. but your understanding of trade, currency, economics is all flawed. I think you’ve got to unlearn the Keynesian bullshit you may have learnt at school.

    • Uhm, I’m of the belief that a trade deficit or a current account deficit is, by definition, financed. But in a country where the RBI holds dollars and is willing to intervene, the “floating currency will fix things” notion is flawed; to the extent that the RBI will intervene, the indian currency will not devalue (of course, we would then change money supply which will have to be addressed separately)
      Some of these remittances are debt, in the sense that they are kept in repatriable accounts. About 25% of our external debt is in the form of such short term deposits that’ll come due within the year. If they are not renewed, they will cause an outflow and either the currency gets devalued or RBI intervenes and mucks up money supply.
      ANd in the end, remittances do pay for imports, and they also free up domestic resources for investment. Everything plays a part in everything else; I agree that I shouldn’t say it such that we are “dependant” on remittances for our imports (not true), but the point is that they all make each other happen. If we didn’t import so much, chances are that the factors that lead to that situation ensure we don’t have enough remittances either.
      Trade is not “inherently” balanced when you have central bank intervention – for ex. China. There’s nothing inherent about the Chinese trade balance or the lack of it. It is made possible by a policy that exchanges short term gain for much longer term pain.
      And thanks for keeping the discourse civil.

  • IndianHayek says:

    I buy a macbook pro today and instantly create a 2000$ trade deficit with US. Explain to me how anyone is made worse off here. An american perhaps invests this 2000$ in indian equity or FDI.
    In this unfortunate world of fiat currencies, the intervention of central banks is not an exception but the rule of the game. Everyone does it – China is not an exception. Assuming Chinese yuan is kept deliberately very low, it can only mean cheaper goods for indian customers and most certainly inflation for chinese people. I am certain indians don’t lose out in this transaction. Chinese trade with indians in the hope that they can buy indian goods or invest in India or convert rupees into dollars. Chinese investing(risking) their earned rupees in indian equity/debt should be even better for the economic growth in india. If anybody should be complaining about this state of affairs, its the chinese citizens not their trading partners.
    As long as Indians produce something “valuable” to people around the world or be seen as an attractive investment destination, others would continue to sell their goods to Indians. This does not mean that our dollar equivalent of exports should be greater than the dollar equivalent of the imports for us to be somehow more prosperous. How can it be realistic to expect zero deficit for all the countries in the globalized world of trade between hundreds of countries. I am sure we were not running much of a trade deficit with china before the 1990s. Would you rather be in India of today or before 1990s.
    You may lament the monetary policies of india & China for the inflation they create in their respective countries but that is very different from suggesting trade deficit is a bad thing for an economy (as you do in this post & a few other posts). Then you are just being a protectionist.
    Politicans by their profession are supposed to be protectionists as they do in a democracy to appease their rent seeking constituency. I am assuming you are not a politician so wonder what your rationale is.

    • You’re arguing that intervention is not bad. I’m saying it distorts the “inherent” link between trade balances and currency valuations. The macbook pro argument is needlessly simplistic – in a broader context the large purchases of US products by Indians should either a) result in us building better products that the US wants and thus theres some reverse flow or b) the rupee should devalue. But instead if I tell Apple that it can hold rupees instead of dollars, and the US is happy to buy India’s government debt and print dollars to pay local salaries instead, then no one is hurt at all; we can keep importing while the US exports until everyone is hurt when the Indian government becomes a profligate spender and starts to print money like crazy. The distorting impact is what I’m talking about.
      In that context, I think intervention is bad – and not par for the course, like you mention – but it happens anyhow.
      Trade deficits needn’t be zero (who argued that?). And a trade deficit being “bad”? It’s something that’s worthy of correction by addressing imbalances, but I hardly think it’s bad – if I produce that impression, I apologise. I thought it was a bad deal to hold the rupee down when it reached 38, and I continue to believe it is ridiculous tonot allow foreigners to invest in our sovereign debt. I think it’s also stupid for RBI to hold dollars or for the rupee to not be absolutely tradeable. These are not protectionist statements. having said that I think many countries will, in the next few years, resort to protectionism, and at one level we must protest, at another level we need to learn to cope.
      Also you assume too much; that i”m protectionist, that I think trade deficits are universally bad, that I always have an issue with intervention (there are times when it’s useful, and I’ve mentioned it on the blog). These will lead you to conclude I’m in this camp or that – but if you will stop assessing my motives and work with the argument, it’s a far easier debate.