Invisibles in India’s Balance of Payments : An Analysis of Trade in Services, Remittances and Income*

The developments in invisibles, which lend a marked support to India’s balance of payments, are reflective of the ongoing structural transformation within the economy as well as its increasing integration with the world economy. With global financial crisis, there was a decline in invisibles, especially during the second half of 2008-09, which has also continued during the first half of the current financial year. Both invisibles receipts and payments have registered declines. The decline in the receipts has mainly been driven by software services and workers’ remittances while the decline in invisibles payments was led by travel, transportation and non-software services. Consequently, net invisibles declined, though they continued to lend significant support to India’s balance of payments, financing around 68 per cent of India’s trade deficit during the first half of 2009-10. Despite the recent slowdown in invisibles, it is expected to make a turnaround in 2010 and beyond in consonance with the global economic recovery, which is gaining momentum. A noticeable development has been the broad basing of invisibles receipts, which hitherto have been dominated by software receipts and workers’ remittances, with non-software services gaining in importance in the recent period.

I. Introduction

The invisibles account in balance of payments reflects the combined effects of the transactions relating to international trade in services, income associated with non-resident assets and liabilities, labour and property and cross border transfers, mainly workers’ remittances. The invisibles have been providing substantial support to India’s balance of payments in the recent years and are reflective of the ongoing structural transformation within the economy as well as its increasing integration with the world economy. Receipts under invisibles, particularly in the last one decade, have grown significantly. The emphasis on reforms and liberalization since the early 1990s has not only unfolded newer opportunities for businesses but also for skilled labour as reflected in the direction of India’s trade in goods and services and nature of labour migration. This transformation is reflected in the growth of receipts under invisibles, which has kept pace with merchandise exports growth as the principal foreign exchange earners for the country.

However, mirroring the adverse impact of the recent global financial crisis, both invisibles receipts and payments have registered declines during the first half of 2009-10 as compared with the corresponding period of the previous year on top of a significant moderation in growth during 2008-09. Receipts under both software and non-software services declined as invisibles payments too declined mainly due to lower payments towards travel, transportation, non-software services and private transfers. It is noteworthy that software services, which have registered phenomenal growth in the recent years and have been the driver of growth of invisibles receipts, were also adversely affected by the global financial crisis and registered declines in the first half of 2009-10. Private transfer receipts, which have lent significant strength to India’s BoP position in the recent years, also exhibited significant deceleration in growth on account of the global financial crisis.

In view of their importance, the developments in different components of invisibles are analysed and disseminated in two stages viz., (i) standard presentation with broad heads on a quarterly basis to meet the IMF’s Special Data Dissemination Standards (SDDS) on the Reserve Bank of India’s website and subsequently in the monthly bulletin of the Reserve Bank of India (RBI), and (ii) detailed presentation with break-up of broad heads is published in an annual article titled ‘Invisibles in India’s Balance of Payments’ in the RBI’s monthly bulletin ¹ .

This article seeks to contribute to the endeavour of providing the disaggregated information on India’s trade in invisibles for the period 2007-08 (revised), 2008-09 partially revised) and April-September 2009 preliminary) along with the time series data since 2000-01. The article is organised as follows. Section II presents the magnitude and trends in the invisibles account at the aggregate level along with their relative importance in terms of GDP. An analysis of the various components of invisibles and their dynamics is presented in Section III. This section also provides an international perspective to the invisibles account drawing from cross country experiences. Concluding observations and a short-term outlook against the backdrop of the ongoing global financial crisis are set out in Section IV. A detailed enumeration of compilation, dissemination, concepts and definitions of different heads of invisibles accounts are presented in Annex I and II.

II. Magnitude and Trends in Invisibles

The resurgence of invisibles surplus in the 1990s, after a break in the late 1980s, has significantly minimised the risk to the external payments position. Since the early 1990s, as India embarked upon structural reforms, “invisibles balances” have witnessed steady increases not only in absolute terms but also as a per cent to GDP Table 1 and Chart 1). This, in turn, either restrained the current account deficit within a narrow corridor or contributed to surplus on current account in intermittent years, despite the widening trade deficit. However, mirroring the impact of the recent global financial crisis, the growth of India’s invisibles surplus moderated during 2008- 09 and subsequently turned negative during the first half of the current financial year.

Notwithstanding some deceleration invisibles receipts and payments during 2008-09, they constituted a major portion of the current account receipts and payments, respectively. During the period 2001-02 to 2008-09, the invisibles receipts constituted 45.7 per cent of current account receipts, while invisibles payments accounted for 24.2 per cent of current account payments (Table 2). The lower order of payments vis-à-vis receipts in the invisibles account contributed to the build up of significant surplus, which has witnessed an average growth of 33.1 per cent during 2001-02 to 2008-09 and financed an average of 113.5 per cent of the trade deficit over the same period. However, invisibles’ financing of trade deficit has come down to 75.8 per cent in 2008-09 due to significant increase in trade deficit coupled with lower growth in net invisibles.

As invisibles grew at a faster pace than the overall economic activities, invisibles receipts and payments as a proportion of GDP rose sharply from 7.7 per cent and 4.6 per cent in 2001-02 to 14.1 per cent and 6.3 per cent, respectively, in 2008-09 (Chart 2).

At a disaggregated level, the major contributor to invisibles receipts in India has been services exports followed by transfers and income (Table 3). Services exports accounted for about 62 per cent of the total invisible receipts in 2008-09. Traditionally, while services relating to trade in goods, such as transportation and financing were the major constituents, the rapid developments in telecommunications and information technology has facilitated the emergence of business and computer services as the main drivers of the growth in invisibles receipts. Thus, the focus of services trade has shifted from facilitating trade in goods to trade in services as an independent entity in itself with the four modes of supply viz., cross-border supply, consumption abroad, commercial presence and presence of a natural person. Reflecting these factors, the importance of services exports in India has grown significantly, with the services-GDP ratio rising from 1.4 per cent in 1990-91 to 8.8 per cent in 2008- 09 driven by software services, which have grown in terms of both size and country of destination. India has emerged as a major software exporting country with an export level of US $ 46.3 billion in 2008-09, expanding at an average rate of around 28 per cent in the past eight years. With the continued buoyancy in software exports, on an average, they constituted about 44 per cent of total services exports of India during 2001-02 to 2008-09. Apart from software, business services have also grown significantly, reflecting the emergence of India as a preferred investment destination following a greater integration of the domestic economy with the rest of the world and strong macroeconomic fundamentals.

Within invisibles, ‘transfer receipts’ account for about 29 per cent of the total receipts that constituted about 4 per cent of GDP in 2008-09. Private transfers have relatively been a more stable component of invisibles receipts and it grew from US$ 13.1 billion in 2000-01 to US$ 46.9 billion 2008-09, broadly in consonance with rise in overall economic activity. This reflects a steady increase in inward remittances for family maintenance and higher local withdrawals under NRI deposits on the back of better investment opportunities. With steady increase in private transfers, India continued to retain its prominent position among the leading remittance receiving countries in the world. The sustained expansion in remittances since the 1990s was underpinned by structural reforms, including a market-based exchange rate, current account convertibility as well as shifts in the labour migration pattern to increasingly high skilled categories. However, reflecting the adverse impact of the recent global economic crisis, receipts under private transfers moderated during the second half of 2008-09 as compared with the first half of the year.

Receipts under the income account have also increased substantially in the recent years, except in 2008-09 when it virtually remained stagnant, reflecting mainly higher earnings on deployment of foreign currency assets. Large-scale monetary easing by the major advanced economies and resultant lower level of interest rates led to stagnant interest income during 2008-09 (Chart 3).

In line with the increase in invisibles receipts, invisibles payments have also risen in recent years though the increase has been lower than that of receipts. The services payments that constituted about 71 per cent of total invisibles payments in 2008-09, are primarily driven by payments on account of business, transportation and travel services. The services payments increased from 3.2 per cent of GDP in 2000-01 to 4.5 per cent of GDP in 2008-09 reflecting increased business activity and strong growth in imports. On the other hand, payments under two other sub-heads, viz., income and transfers have been broadly stable, moving in a narrow range of 1.4-1.8 per cent of GDP and 0.1-0.2 per cent of GDP, respectively, during the period. Thus, overall rise in invisibles payments from 4.9 per cent of GDP in 2000-01 to 6.3 per cent of GDP in 2008-09 has been much lower than the growth in invisibles receipts resulting in a significant improvement in net invisibles from 2.1 per cent of GDP in 2000-01 to 7.8 per cent of GDP in 2008-09.

Latest Developments

The robust growth trend observed in invisibles receipts and payments in the past few years was reversed during the first half (April-September) of 2009-10, reflecting a lagged impact of slowdown in the advanced economies following the financial crisis (Table 4). Invisibles receipts declined by 11.6 per cent during April-September 2009 as compared with the corresponding period of the previous year (32.5 per cent growth during April-September 2008). The decline in invisibles receipts was mainly attributed to the lower receipts under almost all the components of services. Though, invisibles payments also declined, due to lower payments towards travel, transportation, non-software services and private transfers, on net basis, invisibles stood lower during the first half of 2009-10 as compared with the corresponding period of the previous year. At this level, the invisibles surplus financed about 68.0 per cent of trade deficit during April-September 2009 as against 75.4 per cent during April-September 2008.

A detailed component-wise analysis of invisibles receipts and payments is discussed below for a better understanding the dynamics of India’s invisibles account, especially from a cross-country perspective.

III. Composition of Invisibles

III.1 Trade in Services

The trade in services comprises of commercial services categorised under transportation, travel and other commercial services, and Government services not included elsewhere (GNIE). Other commercial services comprise of communication, construction, insurance,royalties and licence fees, other business services, personal, cultural and recreational services, and computer and information services.

An important feature of services exports of India has been a structural shift since 2003- 04, driven by the emergence of new avenues of services exports attributed to a rapid expansion in international trade and investment facilitated by an increased liberalization and the use of technology. According to the latest data published by the IMF, India’s share in world exports of services has more than doubled between 2003 and 2008 to reach 2.7 per cent (Table 5).

Reflecting the positive developments in terms of the comparative advantage and the continued buoyancy of India’s services exports, India was ranked at the 10^th position in terms of its market share in the World services exports during 2008, which is an improvement over its 11^th position last year (Table 6).

At a disaggregated level, the trade in services has been dominated mainly by software services and non-software miscellaneous services, which include business and professional services (Table 7). Software services continued to be buoyant, with its share in total services exports increasing to 45.5 per cent in 2008-09 from 44.6 percent in 2007-08. Despite a decline in software exports during the first half of 2009-10, its share in total services exports increased to 53.4 per cent during the period indicating that the decline in other categories of services exports has been higher. Within the services exports, the rising prominence of business services reflects the high skill intensity of the Indian work force. The shares of travel in total services export has generally exhibited declining trend in the past two decades despite a revival in international tourist interest in India in recent years. The share of travel in total services exports declined while that of transportation remained constant during 2008-09.

III.1.1 Software Services

Exports of software and IT-enabled services (ITES) increased to US $ 46.3 billion in 2008-09 as compared to US $ 40.3 billion during 2007-08 (Table 8). The Indian IT-BPO industry, which experienced exceptional growth benefitting from growing globalization, has emerged over time as a key sector of the economy in terms of contribution to growth, export earnings, investment, employment and overall economic and social development. Notwithstanding increasing competitive pressures, India continues to remain as an attractive source due to its low cost of operations, high quality of product and services, and readily available skilled manpower. Furthermore, a favourable time zone difference with North America and Europe helps Indian companies achieve round the clock international operations and customer service. India’s software exports have been offsetting trade deficit significantly in recent years, which has helped in containing current account deficit at comfortable level. Despite the global economic and financial crisis and the related pressures on external demand, exports of software and IT-enabled services exhibited a steady growth of around 15 per cent during 2008-09. Although India’s software exports remained strong over the years, slowdown in global demand due to the crisis did affect the export performance to some extent. According to National Association of Software and Service Companies (NASSCOM), while the US (60 per cent) and the UK (22 per cent) remained India’s largest markets for IT-BPO exports in 2008-09, the industry has also been steadily expanding to other regions - with exports to continental Europe, in particular, growing significantly in the recent years. The strategy of geographical diversification along with strong focus on productivity, benchmarking and enhanced operational efficiencies has helped the industry to retain its competitive edge as the global leader in software services exports.

According to the NASSCOM, the industry’s vertical market exposure was well diversified across several mature and emerging sectors. Banking, financial services and insurance (BFSI) remained the largest vertical market for Indian IT-BPO exports (50.4 per cent), followed by hightechnology and telecommunications (22 per cent) in 2008-09. From a customers’ point of view, the focus has been on consolidation, integration and regulation – all of which are expected to drive newer business opportunities for the Indian IT industry.

Broad-based growth, across all the segments of IT services, BPO, product development and engineering services, has reinforced India’s leadership as the key sourcing location for a wide range of technology related services. Accordingly, India has continued to be ranked first in the exports of computer and information services in the international economy since 2005 (Table 9). According to a recent NASSCOM Report titled “IT-BPO Sector in India-Strategic Review 2010”, software export revenues are estimated to be around US$ 49.7 billion in 2009-10, registering a growth of about 7 per cent over the previous year, and contributing about 67 per cent of the total IT-BPO revenues. IT and ITES exports are expected to account for over 99 per cent of total software services exports, employing around 1.8 million employees. In terms of geographical coverage, the year 2009-10 was characterised by a strong revival in the US, which increased its share to around 61 per cent. Emerging markets of Asia Pacific also contributed significantly to overall growth. However, revenues from Continental Europe and UK, which registered the highest growth in the last five years, have lagged behind during 2009-10 due to the lingering of recessionary conditions coupled with loss of revenue on account of currency fluctuations in these regions.

The year 2009 reportedly saw increased adoption of outsourcing from not only the biggest segment i.e., BFSI, but also new emerging verticals of retail, healthcare and utilities. India topped the list accounting for more than half of global market in technology and business process outsourcing (around US$ 47 billion of US$ 94 billion global sourcing revenue). NASSCOM expects IT services to grow by 2.4 per cent in 2010, and 4.2 per cent in 2011 as companies coming out of recession tend to harness the need for information technology to create competitive advantage.

III.1.2 Business and Professional Services

Business, professional and technical services are among the most thriving services sectors in developed countries as well as in some developing countries like Brazil and India. These services range from legal to management services, and from architectural to advertising services. India’s non-software services constituted almost 31 per cent of total services exports in 2008- 09, which in turn, have supported steady growth in invisibles receipts. Within nonsoftware services exports, the share of business and professional services, which had grown significantly in recent years and constituted around 63 per cent in 2007-08, declined to around 52 per cent in 2008-09, mirroring the impact of global financial crisis (Table 10). Both business services receipts and payments, which increased significantly in the recent years, declined during 2008-09.

The major constituents of business services have been management consultancy, architectural engineering and other technical services, maintenance of offices abroad and trade-related services (Table 11). These reflect the underlying momentum in trade in professional and technology related services. While receipts under business and management consultancy services increased, the receipts under trade related services, architectural, engineering, and other technical services declined during 2008-09. Business services payments also declined during 2008-09 mainly on account of decline in trade related services and expenses on account of maintenance of offices abroad. With the rising demand for infrastructure and as a favourable destination for international companies for meeting the IT needs, India is emerging as an important country for trade in engineering services. Engineering services mainly include consultancy in designing and detailed designing services.

III.1.3 Travel

Receipts under travel represent expenditure by foreign tourists towards hotel expenses and goods and services purchased including domestic travel. Travel receipts, which had benefited from robust growth in tourist arrivals in the recent years (Table 12), however, declined during 2008-09. Travel receipts at US$ 10.9 billion during 2008-09 declined by 4.0 per cent as against an increase of 24.4 per cent in 2007-08, reflecting a slowdown in tourist arrivals in the country, particularly during the second half of the year, as a result of global economic slowdown and scare created by the outbreak of swine flu. According to the data released by the Ministry of Tourism, foreign tourist arrivals declined by 8.6 per cent in the second half of 2008-09 as against an increase of 8.3 per cent in the first half of 2008-09.

Even travel payments, which have increased in the recent years, reflecting liberalization of the payments system, growing globalization, rising services exports and associated business travel as well as the preference for higher studies abroad, also came under pressure during 2008-09. Travel payments growth remained lower at 1.8 per cent during 2008-09 (38.5 per cent in 2007-08) reflecting a sharp reduction in outbound travels.

India’s share in world tourists’ earnings remained at 1.3 per cent in 2008, the same as in 2007. However, India’s ranking in the world tourist earnings slipped to 20 th position in 2008 from 17 th in 2007 (23 rd in 1990) (Table 13).

III.1.4 Transportation

In view of the rising merchandise trade over the years, the receipts and payments towards transportation, which mainly represent carriage of goods and people as well as other distributive services (such as port charges, bunker fuel, stevedoring, cabotage, warehousing), have also increased over the years. Receipts under transportation increased to US$ 11.3 billion during 2008-09 from US$ 10.0 billion in 2007-08, while payments were higher at US$ 12.8 billion as compared with US$ 11.5 billion during the same period. At this level, the transportation receipts constituted 11.1 per cent of total services exports during 2008-09, the same as in the previous year.

III.1.5 Insurance

Insurance consists of insurance on exports/imports, premium on life and nonlife policies and reinsurance premium from foreign insurance companies. Insurance receipts and payments are generally associated with the movement in India’s merchandise trade. The share of insurance receipts in total services receipts, which had remained in a narrow range of around 2 per cent of total services exports since the early 1990s, decreased to around 1.4 per cent in 2008-09.

III.1.6 ‘Other’ Component in Services

In addition to the software services, business services, travel, transportation and insurance, the other component under trade in services includes a host of other commercial services such as financial, communication, construction and personal, cultural and recreational services. However, financial and communication services are the two major components (Table 10). Under financial services, both receipts and payments have witnessed a significant increase in recent years reflecting greater merger and acquisition activities by domestic companies abroad as well as increasing access by Indian corporates and banks to international financial markets. Financial services cover financial intermediation and auxiliary services provided by banks, stock exchanges, factoring enterprises, credit card enterprises and other enterprises. The receipts relating to financial services increased during 2008-09 while payments registered decline, mainly on account of significant decline during the last quarter of the year. Both financial services exports and imports were around US $ 3.9 billion and 3.0 billion, respectively, in 2008-09. India ranked 8 ^th position in terms of financial services exports and 5th position in terms of import of financial services (Table 14).

Communication services exports have also increased significantly in recent years, reflecting technological transformation of the domestic economy as well as significant liberalization of the telecom sector. However, during 2008-09 communication services exports declined by around 10 per cent. India ranked 6 ^th amongst the world’s top 15 telecommunication exporters in 2007 (Table 15).

III.2 Transfers

Transfers comprise official transfers and private transfers. Private transfers, mainly workers’ remittances, have remained buoyant in recent years on the back of robust global output growth, amidst constant improvement in remittance infrastructure domestically. However, in the aftermath of global economic slowdown, the growth of remittances, though positive,significantly decelerated to 7.8 per cent in 2008-09 from 41.1 per cent in the previous year. The details of private transfers are set out below.

III.2.1 Private Transfers: Remittances for Family Maintenance and Local Withdrawals from NRI Deposits

Inflows from overseas Indians are mainly in the form of: (i) inward remittances towards family maintenance, and (ii) deposits in the Non-Resident Indian (NRI) deposit schemes with the banks in India. Transfers represent one-sided transactions, i.e., transactions that do not have any quid pro quo, such as grants, gifts, and migrants’ transfers by way of remittances for family maintenance, repatriation of savings and transfer of financial and real resources linked to change in the resident status of migrants. Accordingly, remittances from overseas Indians towards family maintenance and the funds domestically withdrawn from the NRE deposits and NRO deposit schemes are treated as private transfers, which are included in the current account of the balance of payments. As against this, the inflows from overseas Indians for deposits in the NRI deposit schemes are treated as capital account transactions.

III.2.2 Trends and Composition of Workers’ Remittances

III.2.2.1 Trends

Workers’ remittances to India have shown buoyancy in the recent years and have imparted significant resilience and strength to India’s balance of payments in the past,especially under adverse external conditions. At present, India is among the top remittance receiving countries in the World. Remittances have helped in offsetting India’s merchandise trade deficit to a large extent. The significance of remittances can be gauged from the increase in the share of private transfer receipts in India’s GDP from 0.7 per cent in 1990-91 to 4.1 per cent in 2008-09. The relative stability in such transfers reflected the steady increase in inward remittances for family maintenance and higher local withdrawals on the back of better domestic investment opportunities. From the sources side, a significant share of remittances to India continued to be from the oil exporting countries of the Middle East. Another important source of remittance inflows to India is the US. In the Indian context, a major part of funds remitted by expatriate workers is channelised through inflows to non-resident deposits in the form of local withdrawals. During 2008-09, private transfer receipts, comprising mainly remittances from Indians working overseas, increased over the previous year. However, there was a moderation in remittances inflows during the second half of 2008-09, with deepening global financial crisis affecting the employment prospects and sharp decline in oil prices affecting the demand for expatriate labour in the oil exporting Gulf countries from where a significant share of remittances to India originates. As a result, there has been moderate rise in remittance inflows from overseas Indians to US $ 46.9 billion during 2008-09 as compared with US $ 43.5 billion in 2007-08 (Table 16). Similarly, private transfer receipts increased to 27.5 billion in April-September 2009 from US$ 26.4 billion in the corresponding period of the preceding year. The share of private transfers in the current receipts declined marginally to 13.3 per cent from 13.8 per cent during 2007-08.

Remarkable increase in workers’ remittances could be traced to a few structural factors. First, in the 1990s, migration to Australia, Canada, and the United States increased significantly, particularly among information technology (IT) workers on temporary work permits. Second, the swelling of migrants’ ranks coincided with better incentives to send and invest money, liberalisation of regulations and controls and more flexible exchange rates. The convenient remittance services provided by Indian and international banks have also shifted such remittance flows from informal channels to banking channels. Third, non-resident Indians have also responded to several attractive deposit schemes and the policy initiatives on thisfront. Apart from these structural factors, some current developments that guided the remittances flows include: depreciation of the rupee, hike in interest rate ceilings on NRI deposits since September 2008 and uncertainties in oil-prices, which might have induced the workers to remit their money to India as a hedging mechanism due to its relatively better growth prospects.

According to the World Bank, India continues to be the top remittance receiving country in the world and it received significantly higher remittances to the tune of US$ 51.6 billion in 2008 as compared with US$ 37.2 billion in 2007 (Table 17). As per World Bank’s estimates, remittances to India declined to US$ 47.0 billion in 2009 reflecting a lagged response to weak global economy (Box I).

III.2.2.2 Composition

Private transfers primarily comprise of remittances for Family Maintenance, Local Withdrawals from Non-Resident Rupee Account, Gold and Silver brought through Passenger Baggage, and Personal gifts/ donations to charitable/religious institutions.

III.2.2.2.1 Remittances for Family Maintenance

The share of remittances repatriated by the overseas Indians for family maintenance, which contributed a significant share of remittance flows to India at about 60 per cent in 1999-2000 declined to around 42 per cent in 2005-06. Subsequently, however, its share increased and reached 51.0 per cent during 2008-09. (Table 18).

III.2.2.2.2 Local Withdrawals from Non- Resident Rupee Deposits

Local withdrawals from non-resident rupee deposit schemes, as part of workers’ remittances, are the withdrawals from Non- Resident (External) Rupee Account [NR(E)RA] and Non-Resident Ordinary (NRO) Rupee Account by the non-resident or his dependent for local use. Such local withdrawals/redemptions from NRI deposits cease to exist as liability in the capital account of the balance of payments and assume the form of private transfers, which is included in the current account of the balance of payments.

Although the average contribution of local withdrawals to total private transfers declined from 50 per cent in the first half of the 1990s to only 29 per cent in the latter half, a reversal in this trend has been witnessed in the recent period. Since 2003-04, there has been relatively rising significance of the local withdrawal route as a conduit to remittance inflows to India (Table 19). The share of local withdrawals in the total private transfers increased marginally to 44.0 per cent during 2008-09 as compared to 43.5 per cent during 2007-08.

Box I: Impact of Global Crisis on Remittances

Remittance flows to developing countries had shown relative stability during the past crises and were also countercyclical during downturns in the recipient economy. However, during the recent global economic crisis, with both the developed and developing countries, albeit to different degrees, facing economic slowdown, it was argued that remittances to developing countries could witness a significant slowdown.

According to the latest World Bank estimates (November 2009), from a regional perspective, East Asia and Pacific, and South Asia regions are expected to record the lowest decline of close to 2 per cent, while Europe and Central Asia may witness the highest decline of about 15 per cent. Apart from falling income on account of jobless growth, the increased uncertainty about exchange rates during periods of heightened volatility and immigration controls are expected to depress remittance flows. Remittance flows to developing countries, in fact increased to US$ 338 billion in 2008 from US$ 289 billion in 2007 and are projected to decline only moderately by about 6 per cent to US$ 317 billion in 2009. This is mainly attributed to the fact that while fresh migration has fallen, there is no evidence of existing migrants returning even though the job market has been weak in many destination countries.

Indian Scenario

In the past, workers’ remittances to India have imparted significant resilience and strength to India’s balance of payments, particularly during periods of notable capital outflows or adverse external shocks. The surge in workers’ remittances to India, responding to oil boom in the Middle East during the 1980s, and the information technology revolution in the 1990s, has put India among the top remittance receiving countries in the World. Remittances have also helped to a large extent in offsetting India’s merchandise trade deficit. The relative stability in such transfers, compared to other capital account items such as NRI deposits, foreign direct investment and portfolio investment, has also enabled the containment of the current account deficits at modest levels in the face of pressures on other accounts of balance of payments (BoP).

During the current crisis, however, there has been a significant deceleration in the rate of growth of remittance flows to India, especially since the second half of 2008-09. Notwithstanding this trend, India retained its top position as the largest recipient of remittances in 2008 at US$ 51.6 billion, as per the World Bank data, Moreover, as per the balance of payments (BoP) data released by the RBI, remittances have increased further during the first half of 2009-10 (April-September) as compared to the second half of 2008-09. Thus, the apprehension that global recession and the weakening employment prospects in the host countries could affect India’s inward remittance flows significantly during 2009-10 appears to have been unfounded. The higher remittance flows to India could be attributed to a number of factors, such as, relatively higher growth performance of the Indian economy making it an attractive investment destination, the hike in interest rate ceilings on NRI deposits since September 2008 and uncertainties in oil-prices, which might have induced the workers to remit their money to India as a hedging mechanism due to its relatively better growth prospects. According to a recent RBI Survey on Remittances by Overseas Indian (November, 2009), North America continued to be the most important source region of remittances to India accounting for nearly 38 per cent of the total remittances, followed by the Gulf region (27 per cent) and Europe (18 per cent). In view of the above, any further improvement in the outlook for remittances to India would critically hinge upon the economic recovery in the advanced economies. Moreover, the recent increase in international oil prices is likely to support remittances from Indian workers in the Gulf region. Going by the latest trend, India could retain its position as the largest remittance recipient country even during 2009, thereby providing resilience to the invisibles account.

References:

1. Ratha, D., S. Mohapatra and A. Silwal (2009), “Migration and Remittance Trends 2009”, Migration and Development Brief 11, World Bank, November.

2. World Bank (2009), Global Development Finance 2009.

The rising trend in local withdrawals could be attributed to higher income levels of migrants in the recent past as well as better domestic investment opportunities engendered by robust growth and relatively benign inflation conditions. Even during the current global financial and economic crisis, the gross inflows to NRI deposits and the steady trend in local withdrawals indicate the stability and sustainability of remittance inflows over the medium term. It may be noted that a major part of outflows from NRI deposits (constituting about 85 per cent, on an average) is in the form of local withdrawals from NRI deposits. However, during 2007-08, the share declined significantly to around 65 per cent and further to 63 per cent in 2008-09, reflecting higher outflows under the FCNR (B) accounts.

III.2.2.2.3 Gold and Silver brought through Passenger Baggage

Under the liberalised policy for imports, the Government of India permitted import of gold by certain nominated agencies for sale to jewellery manufacturers, exporters, NRIs, holders of special import licences and domestic users. Nominated agencies/banks were permitted to import gold under different arrangements such as suppliers/buyers credit basis, consignment basis and outright purchase. Thus, after 1997-98 gold imports through passenger baggage by the returning Indians lost its importance as a conduit of remittance flows.

III.2.2.2.4 Personal gifts/donations to charitable/religious institutions

The inflows under this channel, which had generally increased upto 2006-07, cameunder some strain subsequently. The money repatriated is predominantly donations to charitable/religious institutions/NGOs.

III.3 Investment income

Investment income receipts are mainly driven by the interest and discount earnings on the RBI investment of foreign exchange reserves and reinvested earnings of the Indian direct investment enterprises abroad. Investment income receipts rose significantly since the late 1990s due to the build-up of foreign exchange reserves. The rise in reinvested earnings reflects the upward trend in Indian overseas investment by the Indian companies to take advantage of their access to international markets, natural resources, distribution networks, foreign technologies and other strategic assets such as brand names.

Investment income payments mainly include payment of interest on commercial borrowings, external assistance, NRI deposits and other short-term liabilities. In addition, more importantly, it includes reinvested earnings of the FDI enterprises operating in India as well as dividend and profit payments on liabilities such as FDI and portfolio investments. While the interest payments depend on the level of debt and the interest rate environment, the reinvested earning payments are influenced by the profitability, and reinvestment decisions of FDI enterprises operating in India. A shift in the level of investment income payments since 2000-01 partly reflects the inclusion of reinvested earnings of FDI enterprises as per the revised procedure of recording FDI in India in line with the international best practices. The growth in investment income payments, especially since 2004-05, has been mainly
led by reinvested earnings and dividends and profits reflecting higher returns in the Indian capital market and improved corporate profitability (Table 20).

While both receipts and payments under the investment account have increased in recent years, except during 2008-09, the higher payments relative to receipts have resulted in net deficit (Table 21). During 2008-09, lower global interest rates resulting from significant monetary easing by advanced economies to contain the adverse impact of the global financial crisis resulted in a marginal decline in investment income receipts to US$ 13.5 billion from US$ 13.8 billion in 2007-08. Similarly, investment income payments declined marginally to US$ 17.5 billion during 2008-09 (US$ 18.2 billion in 2007-08) mainly due to decline in profit and dividends, and reinvested earnings of FDI companies in India.

IV. Concluding Remarks and Outlook

The revival of invisibles surplus since the 1990s has lent considerable support to India’s balance of payments position. The persistence of invisibles surplus coupled with significant capital inflows have facilitated the process of forward movement in regard to easing of payment restrictions on current and capital account transactions both for individuals and corporates. It is noteworthy that both gross receipts and payments in India’s invisibles accounts have risen significantly over the years reflecting gradual opening up of Indian economy and growing volume of economic activity. The strong growth in services exports, especially of software and information technology services, and buoyant remittances from overseas Indians have imparted stability to invisibles receipts. On the other hand, the growth in invisibles payments has been mainly led by interest payments relating to external debt, dividends/profits paid on foreign investment, and payments relating to technology related and business services. Not only in absolute terms but also as a per cent of GDP, net invisibles have witnessed a significant improvement in recent years.

The two major components of India’s invisibles, viz., software services and private transfers have provided stability to India’s current receipts. The significant technological transformation of the Indian economy as well as the growth in skilled manpower has enabled this process. India continued to be a leader in software exports as well as private transfer receipts during 2008-09. Notwithstanding the adverse impact of the global crisis, software services exports (4.0 per cent of GDP) and private transfer receipts (4.1 per cent of GDP) were higher during 2008-09 than the previous year, though, with the deepening of the global financial crisis, some moderation was witnessed during the second half of the year.

The robust growth trend observed in invisibles receipts and payments in the past few years was reversed during the first half (April-September) of 2009-10, reflecting a lagged impact of slowdown in the advanced economies following the financial crisis. Both invisibles receipts and payments declined as compared with the corresponding period of the preceding year as a result of which, net invisibles surplus stood lower during the first half of 2009-10.

All the components of services, including software services, registered lower receipts during the first half of the year as compared with the corresponding period of the previous year. Private transfer receipts, which have lent considerable support and stability to India’s balance of payments in the recent years, also came under strain registering significantly decelerated growth during the first half of the current financial year. However, improving global economic conditions signifying return of consumer confidence and renewal of business growth is expected to drive IT spending in the foreseeable future.

The pickup in demand, both external and internal, on the back of global economic recovery and strong growth performance of the Indian economy should augur well for the growth prospects of other services during 2010. The hardening of global interest rates as major economies exit the accommodative monetary policy stance could lead to an increase in investment income receipts. Even in the case of private transfers, the deceleration in growth in the current financial year in lagged response to a weak global economy will reverse slowly but reverting to the pre-crisis growth levels may take some time and would depend on the pace of the global economic recovery. Thus, India’s invisibles sector, which has come under some pressure during 2009-10, is expected to make a turnaround in 2010 and beyond and will continue to lend considerable support to India’s balance of payments position in future.

References

1. International Monetary Fund (1993), ‘Manual on Balance of Payments Statistics’, 5^th edition.

2. International Monetary Fund (2009), Balance of Payments Statistics Yearbook 2009.

3. NASSCOM (2010), ‘Strategic Review 2010- The IT Industry in India’ February.

4. NASSCOM (2006), ‘Globalisation of Engineering Services – The Next Frontier for India’ August, Research Report.

5. Ratha, D., S. Mohapatra and A. Silwal (2009), ‘Migration and Remittance Trends 2009’, Migration and Development Brief 11, World Bank, November.

6. Reserve Bank of India (2007), ‘Report of the Technical Group on Statistics for International Trade in Banking Services’.

7. Reserve Bank of India (2010), ‘Remittances from Overseas Indians: Modes of Transfer, Transaction Cost and Time Taken’, Reserve Bank of India Bulletin (forthcoming).