The Remittance Paradox

The Remittance Paradox

In today's Finshots, we talk about migrant workers and the gulf economy


Business

The Story

A couple days ago, Bloomberg had a very interesting story. It went something like this — “Migrant workers from Asia’s developing countries have managed to send home record amounts of money in recent months, defying pandemic expectations and propping up home economies at a critical time.”

On first reading this sounds like great news. But alas, there's more to this story than what meets the eye. However before we get to the juicy bits, some context.

India has had long ties with countries in the Gulf Co-operation Council (GCC) i.e. Bahrain, Oman, Kuwait, UAE, Qatar and Saudi Arabia. Close to 10 million Indian citizens live and work here. And they play a pivotal role in the region’s economic development. More importantly, they repatriate a bulk of their earnings. Meaning they send their savings back home. And these remittances add up. For instance last year, they totalled ~$50 billion. That’s a lot of money. And make no mistake, this money will enter the Indian economy. Households might choose to invest their savings or consume it immediately. But either way, it aids growth in our country.

So when you see remittance figures shoot up, there’s very good reason for you to be excited. Unfortunately, this time around, we might be seeing these trends for an entirely different reason.

For instance, when Covid-19 made landfall, my brother, who happened to work in Qatar packed his bags and headed home fearing that an eventual lockdown might leave him stranded. And considering the uncertainty surrounding the whole issue, he also decided to liquidate (sell) most of his investments and send it back to India. Even others were laid off much earlier and were forced to sell and repatriate whatever little they owned.

So it’s no surprise that remittance figures have seen an uptick. But there’s no reason to cheer this development either, because my brother isn’t sure if he will ever go back considering the precarious nature of the gulf economy right now. And if there are more like him, they’ll have to face similar prospects too.

Think about it. Oil prices have stayed low for quite a while now. And there is some consensus that demand for crude oil is going to crater even after the pandemic tides over considering fears of a global recession still loom large. And since GCC countries largely rely on oil money to fund their spending programs, we have an immediate problem. After all, government entities are responsible for employing a quarter of GCC's population. Most of them are blue collar workers — working construction and maintenance jobs. So when the government has to cut spending, layoffs inevitably follow.

More importantly, during times of economic recession, GCC countries flock to protect the local population. As one report from Orfonline noted —

“Following the oil price drop and resultant economic decline in 2015–16, the GCC countries enacted measures to reserve jobs for locals and reduced the number of visas issued to migrants. A study by GulfTalent on employment trends in 2016 found that following the oil shock, these countries took steps to not only increase the number of citizens in private-sector jobs, but also laid-off many foreign workers. Emigration from India to the GCC countries halved between 2015 and 2017.”

And so if the expat population can’t go back, those remittance figures might never look this good for a long long while.


Finshots Brief

Issue 3- On share pledging, cheap smartphones and gold smuggling

In today's Finshots brief, we talk about

  • Why Tata wants to buy out Shapoorji Pallonji's stake in Tata Sons
  • Jio's plan to sell smartphones
  • India's gold smuggling problem

You can read the full draft here.


Recommended Reading

Why do good people do bad things?

Many readers were perplexed after reading our story on HSBC yesterday. They had several questions — How do checks and balances within financial institutions fall apart so easily when millions of dollars are at stake? How can so many people turn a blind eye to an obvious fraud all in the name of doing business? How can seemingly good people do such terrible things out of the blue? And while these are perfectly legitimate questions, I am not sure we have the expertise to offer the right answers here. However, in a bid to offer more context, we thought we would recommend you something— particularly on the psychology of fraud. So if you are one of those people looking for answers to these deep existential questions, head over to NPR and read/listen to this excellent article :)


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Until next time...