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Fine-tuning policy on invisibles

Although it was always known that inward remittances have helped in bridging the current account deficit, the extent of their contribution has often been understated. This is partly because it is easy to lose focus when three or four dynamic components make up an omnibus category. As the Reserve Bank of India’s annual report for 2006-07 points out, the broad category of invisible receipts comprising services, income from financial assets, labour and property as well as workers’ remittances are rapidly catching up with the merchandise exports. Again, a broad categorisation such as services exports hardly helps in identifying the threats and opportunities in each of the sub-areas. For instance, the deleterious consequences of rupee appreciation on leading software exporters such as Infosys are highlighted but the magnitude of reduction in a migrant worker’s monthly remittance from say, Saudi Arabia, is hardly known. It might be an opportune time for policy makers to look at the sub-groups more closely in order to frame strategies to boost these receipts, which in 2006-07 accounted for 48 per cent of all current receipts as against 29 per cent in 1990-01. Gross invisible receipts rose from 7 per cent of the GDP to 13 per cent last year. The net surplus under invisibles financed more than three fourths of the trade deficit during 2006-07.

Private transfers including remittances from workers have been a steady and significant contributor to invisible receipts totalling as much as $27.2 billion in 2006-07. According to the IMF, India is the leading recipient of remittances in the world, getting $23.5 billion in 2005, some $3 billion above Mexico which is in the second place. The RBI includes under “remittances” all transfers received from abroad on account of family maintenance in India as well as local withdrawals from non-resident Indian deposits. The generally benign global economic environment has certainly helped in maintaining the remittances at a steady level but, as it points out, a significant improvement in the domestic payments systems has been another contributory factor. Over the years, North America with 44 per cent of the remittances has replaced the Gulf as the most important source. That is explained by the growing presence in the United States of software professionals whose individual remittances back home are significantly higher on an average than what is being sent by migrant workers from West Asia. Around 52 per cent of the remittances go to support the families in India, to meet the costs of food, and shelter. A closer look at the details will help in framing policy responses for each category rather than go in for a broad brush approach.

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