Recession forcing NRIs dip into Indian nest eggs

By Kul Bhushan: The economic crisis in the United States and Britain is reportedly forcing many NRIs to dip into their savings and assets back home. Due to job losses, default of mortgage payments and losses in their businesses, some NRIs are cashing their foreign currency demand deposits in India to stay afloat.

According to a World Bank economist and an expert on immigrant remittances, Dilip Ratha, foreign currency deposits in India have declined by 12 percent between January and December 2008 from USD 41.2 billion to USD 36.1 billion.

The World Bank had estimated that India would receive USD 30 billion, but the Reserve Bank of India data indicated that USD 39.1 billion had already been received in the first nine months. According to past trends, the remittances are usually higher for the fourth quarter that covers the festive season. This would mean that the total could be in the region of USD 45 billion. Obviously, the difference is due to the system for data collection. Despite these conflicting figures, a clear trend is visible in NRIs sending less money to India and also getting some of their deposits back.

Perhaps NRIs are reducing foreign currency deposits in their home country and depositing the money in the US banks? That is unlikely because interest rates in the US are at historic lows, much lower than those in India; and interest rates for foreign currency deposits in India went up in September 2008 as soon as the recession began to emerge in the United States and the rupee began to weaken against the dollar. However, some Indian banks have marginally reduced their rates at the end of January 2009.

Giving reasons why a decline in foreign currency deposits may actually show up as remittance inflows rather than reverse remittances, Ratha maintains that faced with income and employment difficulties due to the financial crisis, some NRIs might be substituting remittances to their families by drawing on foreign currency deposits back home. Indeed, such withdrawal from a repatriable foreign currency deposit to a local currency deposit or cash is considered as remittance inflows in India. This component is believed to make up nearly 40 percent of remittances to India in recent years. And foreign currency deposits have been falling in India last year.

"We have no way of judging the extent of such reverse remittances. Data on outward remittance flows are of questionable quality in most of the countries. Also, many large migrant destination countries do not report high frequency data on inward remittance flows. A modest, and rather indirect, inference about reverse remittances can be drawn from a decline in foreign currency deposits - which are likely held by migrants or their relatives - 12 percent in India," said Ratha.

According to the World Bank, India is the highest receiver of immigrant remittances. Out of an estimated 20 million Indians living abroad, about seven million working Indians keep sending money to India to support their families, build homes, buy land, put down deposits for higher returns than the West, and invest in joint ventures. Some estimate foreign remittances to India were set to cross USD 50 billion but this is unlikely as the recession set in late September and has gone on worsening and will get even worse before it turns around.

Indian states like Punjab and Kerala that depend heavily on foreign currency remittances for hundreds of thousands of families, have already felt the crunch with low remittances. With a sharp decline in visits from their NRI supporters, families in the villages and towns of Punjab are on hard times. Dealers in foreign exchange in Punjab report a decline of 20 percent. Kerala accounts for almost a fifth of all NRI remittances since the Gulf has a huge number of Malayli workers. With a sharp decline in oil prices and new construction, incomes have plummeted. So have the remittances. Over 20,000 workers have returned home.

Another trend in recent months shows that NRIs do not bring loads of foreign exchange on their trips to India, but they withdraw from their 'Indian Rupee' accounts for their local expenses. In addition to saving their scarce dollars, they benefit as they get around Rs.50 to the dollar while they may have deposited their dollars at a much lower rate.

Some have sold their properties in India to pay their mortgages to keep a roof over their heads where they live rather than where they do not. Others have persuaded their relatives to sell their ancestral properties to claim their share. In one such case, a US-based NRI got a fifth of this share amounting to USD 200,000 to stall the foreclosure.

With reverse transfers, both Indians and NRIs are feeling the heat. Truly, the party is over.

(1.03.2009 - Kul Bhushan previously worked abroad as a newspaper editor and has travelled to over 50 countries. He lives in New Delhi and can be contacted at: kulbhushan2040@gmail.com)