US overtakes UAE to become top remittance source for India

The share of Gulf countries in India's inward remittances has declined, reflecting slower pace of migration and presence of Indian diaspora in informal sectors, which was hit the most during the pandemic period, the Reserve Bank of India (RBI) says in its monthly bulletin.

Amid steady migration of skilled workers, advanced economies, particularly the U.S., the U.K. and Singapore emerged as an important source country of remittances, accounting for 36% of total remittances in 2020-21, the central bank says.

"The US surpassed the UAE as the top source country, accounting for 23% of total remittances in the financial year 2020-21," it adds.

As per the RBI, the share of remittances from the Gulf Cooperation Council (GCC) region in India's remittance inflows is estimated to have declined from more than 50% in 2016-17 to about 30% in 2020-21.

The impact of Covid-19-induced stressed income conditions was discernible as small size transactions gained share in total remittances in 2020-21, the central bank says.

The divergence was also reflected in the bank-group wise transactions as public sector banks lost market share while private banks retained their dominance in remittances business, it adds.

Remittances are the second major source of external financing for low and middle-income countries after foreign direct investment.

According to the World Bank Report on Migration and Remittances (World Bank, 2021b), remittance flows to low and middle-income countries declined marginally to $540 billion in 2020, only 1.6% below the $548 billion in 2019.

India, being the top recipient country, was expected to be one of the worst affected as its host country basket was vulnerable to the twin effects of economic slowdown and slump in oil prices.

Defying the early projections, however, India remained the top recipient country, accounting for 12% of total global remittances, recording a marginal decline of 0.2% in 2020 and a growth of 8% in 2021.

Remittances have exceeded foreign direct inflows in several countries, including India, Philippines, Pakistan and Bangladesh, accounting for about 3% of GDP in low-income and 1.6% of GDP in middle-income countries.

The United Arab Emirates (UAE), the U.S. and Saudi Arabia have been the three major destinations of Indian migrants for the past two decades. Out of the total migrants from India, 48.6% were in the UAE, the U.S. and Saudi Arabia as of 2020.

The compositional shift in India's migration towards advanced economies, notably, the U.S., the U.K., Canada and South Africa dominated by high-skilled white-collar workers augurs well for total remittance inflows, the Reserve Bank says.

However, the potentiality of the severe adverse impact on India's low-wage low-skilled workers from the successive waves of the pandemic and the uneven economic recovery in the low and middle-income countries may have long-term implications for remittances inflows, it cautions.

While India's inward remittances remained resilient defying the crisis at the macro level, there have been significant changes in the geographical and socio-economic composition of remittances, driven by the home and host country crisis dynamics and the severity of the impact across different working classes.

The share of the traditional remittance recipient states of Kerala, Tamil Nadu and Karnataka, which had strong dominance in the GCC region, have almost halved in 2020-21, accounting for only 25% of total remittances since 2016-17, while Maharashtra has emerged as the top recipient state surpassing Kerala.