After Benefits of Cheap Oil, India Suffers Lower Gulf Remittances

Chances of US interest rates going up and China’s economy worsening all pose risks for India.

3 min read
Hindi Female

Having quit his low-paid job with a contractor in Qatar, electrician Kurian Joseph scrabbles for work each day in his hometown in Kerala, a southwestern state that has one of India’s highest unemployment rates.

He’s a casualty of the global oil price collapse. Stories like Joseph’s explain why remittances from Indians working abroad slumped 27 percent in the fiscal year through March to $48 billion – the lowest since the 2008 global financial crisis.


Making $250 a month, and faced with a pay cut as construction jobs in Qatar became scarcer, Joseph realised he could no longer afford monthly instalments on his house and son’s education. In January, after 15 years in the Gulf, he decided to go home.

Working conditions became bad after the oil crisis hit construction. Our company could not sustain its large work force
Kurian Joseph, Electrician

Joseph, 56, from Changanassery, a ramshackle town strung along Kerala’s main north-south road , told Reuters, “I am told the company is planning to retrench workers. Many of my friends are planning to return.”

Most of India’s remittances come from the oil-rich Gulf, where some seven million Indians have been working, but more and more are being forced to come home. Earlier this year, 1,000 Indian professionals were laid off by Qatar Petroleum .


Foreign Exchange to Take a Hit

Chances of US interest rates going up and China’s economy worsening all pose risks for India.
A broker reacts while trading at a stock brokerage firm in Mumbai. (Photo: Reuters)

The prospect of further falls in remittances is a hindrance for the Reserve Bank of India, as it seeks to “bullet-proof” the economy against sudden capital outflows. Whereas India’s external balances are in a far better shape than three years ago, when a sudden burst of portfolio investment outflows put the rupee in a tailspin, there are still risks of external shocks.

Chances of US interest rates going up, Britain voting to leave the European Union, and China’s economy worsening all pose risks for emerging markets like India. Portfolio investment is typically the most volatile source of inflows, but last year’s $18 billion drop demonstrated how unreliable remittances can be.

Taking note, an RBI panel warned last month that the likely impact on remittances should be factored into any monetary policy decisions.


Long-Term Adjustment

Though oil prices have recovered more than 50 percent since late January, the rally could easily peter out before the labour market tightens in the Gulf once again. Marie Diron of Moody’s Investors Service warned there could be worse to come for remittances.

We have highlighted the risks of a marked fall in remittances as the Gulf economies’ long-term adjustment to lower oil prices has only just started.
Marie Diron, Senior Vice President ,Moody’s Investors Service

Having covered 50 percent of India’s trade deficit in the previous two years, remittances only covered 40 percent in 2015/16 even though the trade gap had shrunk significantly.

“Essentially an improvement in the trade balance is being offset by worsening private transfers,” said Pronab Sen, country director for the UK-based International Growth Centre’s India programme.


All is Not Lost

On balance, of course, India has benefited massively from cheap crude over the past two years. It halved the oil import bill, cooled inflation and improved public finances, all of which helped the RBI to cut interest rates. Economists expect a balance of payments surplus close to $25-30 billion for 2015-2016, as foreign direct investment inflows into the world’s fastest growing major economy remain robust, and foreign exchange reserves stood at $361 billion on May 13. All of which makes lower remittances a far smaller headache for India than for its neighbours - Bangladesh, Pakistan and Sri Lanka.

Meantime, down in Kerala, Joseph has sold his house and cleared his debts. He plans to build a smaller home and start a business with what money he’s got left.

(This story was published in arrangement with Reuters)

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