Remittances: India's Steadiest External Inflow

A remittance is money a person working abroad sends home. Nothing travels back the other way and no claim is created, so in the external account a remittance sits in the current account as a transfer. An obligation to a household drives that transfer, and an obligation does not reprice when a market turns. The remittance line is the steadiest of the four.

Two ideas sit underneath everything below. The first is the current accountThe half of a country's external statement that records what it earns and spends across the border during a period, as against the other half, which records what it borrows, lends and invests.. Every line discussed below is recorded there. The second is the split between the two kinds of foreign money that arrive looking for a return. What instructs each one, rather than how large either is, decides which kind it belongs to. A remittance is a single line inside the current account, and the contrast with return seeking money is borrowed only to show how the line behaves.

What is a remittance, and where does it sit in the external account?

Start with a person rather than a statistic. A mason from a small town takes work in another country for three years. Every month he keeps what he needs to live on and sends the rest to his household at home, where it pays a school fee, a loan instalment and the electricity bill. Now ask the question the external account has to answer about that money: what went back the other way in exchange for it? Nothing did. No crate was shipped, no work was performed for the sender, no share certificate was handed over, and nobody at home promised to repay a rupee of it.

The external account has a name for a receipt with nothing going back in return, and the name is a transfer. A remittance is classified as a transfer precisely because nothing is exchanged for it, and that is not a filing technicality: it is the reason the line behaves unlike everything else that crosses a border. Every other line has something moving in both directions. Goods go one way and money the other. A service is performed and money comes back. Primary incomeThe line that records income earned on assets held across a border, such as interest, dividends and profits, flowing in each direction. The asset has to exist first for the income to arise. is a payment for the use of something already held across the border, so the asset had to exist before the payment could arise. Only the transfer line has one direction and nothing coming the other way.

Each of those four lines is reported as a net figureWhat survives once money going out has been taken off money coming in. Very large flows can run both ways underneath a single line reading plus 58,000., which is worth holding on to before any of the arithmetic below. The remittance line of Sankhya, an invented republic, reads plus Rs 58,000 crore, and that figure is not a record of money only arriving. The figure is what is left after money sent out of Sankhya by people working there has been subtracted from money sent into Sankhya by people working elsewhere. The same is true of the services line and the primary income line, and a reader who forgets it will read every one of them as larger than it is.

Why does a remittance behave unlike every other inflow?

Think of two people and the different questions they are answering. The first has savings in a deposit and watches the rate. When a better rate appears elsewhere, the money moves, and it moves without hesitation or hard feeling. Moving was the instruction it was given. The second is a nurse working abroad whose mother at home needs medicines every month. When a better rate appears somewhere, nothing about the medicines changes. She is not managing a return. She is answering an obligation.

The difference between answering an obligation and chasing a return is the whole of it, and the difference survives being scaled up to a country. A portfolio inflowMoney from abroad that buys traded securities such as shares or bonds without taking control of the business. Such an inflow can be sold and taken back out, and the decision to do so usually turns on the return available elsewhere. arrives because a return looked attractive, and the same reasoning that brought it in will take it out again when the return moves. A sender does not reprice a household obligation when a market turns. The rent at home did not change because a rate somewhere moved, and the school fee did not fall because a market had a bad quarter, so the money that answers those bills keeps arriving at roughly the same size and roughly the same time.

The contrast does not make remittance money more patriotic, more loyal or better behaved than the other kind. The two kinds are answering different questions, and a question about a household obligation simply has fewer things that can change its answer than a question about a return does. Steadiness is a property of the instruction rather than of the sender's character. Instructions can change, and the three supports under this one are set out below.

How much of Sankhya's goods deficit do remittances cover?

Sankhya sold Rs 2,75,000 crore of goods abroad and bought Rs 3,85,000 crore back the other way, so its goods balanceWhat is left when the money value of goods bought from abroad is set against the money value of goods sold abroad in the same stretch of time. A negative one means more came in than went out, counted in money rather than in crates. is minus Rs 1,10,000 crore. Against that, the remittance line brought in a net Rs 58,000 crore. The second divided by the first gives the cover ratio: 58,000 over 1,10,000 is 52.73 per cent.

Sankhya's remittances cover 52.73 per cent of its goods deficit. Slightly more than half of the country's shortfall on goods is paid for by money that people sent home. Put it at household scale and it stops being abstract. A household is short Rs 11,000/- every month on what it has to pay, and a relative sends Rs 5,800/- of that shortfall each month. The gap has not gone away. The gap has roughly halved, and the remainder is a different size of problem from the one that was there before.

One caution belongs beside that ratio. Saying something false with it is easy. The cover ratio measures relative size and nothing more. The cover ratio does not mean the rupees that arrive as remittances are the rupees that pay for imported goods, and no line in an external account is earmarked for any other line. Money does not carry a label saying what it may be spent on. The ratio answers one question only: how big this line is against that gap. Until the arithmetic is done the answer is not obvious, and that is the whole reason for doing it.

What does the same account look like with the remittance line removed?

Describing a line as important teaches nobody anything. Taking it out and rebuilding the account without it does, so here is Sankhya's current account worked twice. Nothing else changes between the two columns: the goods balance stays at minus Rs 1,10,000 crore, services stay at plus Rs 64,000 crore, and primary income stays at minus Rs 26,000 crore. Only the remittance line is set to nil in the second column.

Take the remittance line out of Sankhya's account and the deficit goes from Rs 14,000 crore to Rs 72,000 crore, 5.14 times as wide, without a single other line having moved. Read against nominal outputThe money value of everything an economy produced in a period, counted in the rupees of that period with nothing adjusted out. Nominal output is the denominator any share of output ratio is divided by. of Rs 17,47,200 crore, the same removal takes the deficit from 0.80 per cent of output to 4.12 per cent. The width of that gap is the entire case for paying attention to the remittance line, and the result is arithmetic rather than opinion: both columns can be checked on paper in under a minute.

Two honest qualifications go with the exercise. The first is that removing a line is arithmetic, not a forecast. If remittances into Sankhya genuinely stopped, households would buy less and imports would change with them. The rest of the account would not sit politely still while it happened, and the real world would not hand over the second column. The second is a matter of comparing this economy against itself. Sankhya has been worked before on one pair of traded goods only, with the income and transfer lines switched off and a trade contrast read off with nothing else moving, and that treatment closed on a surplus. The account above puts all four lines back in and runs the entire economy, so the amounts here are larger and the sign is the other way round. The two are built to different specifications, and neither contradicts the other.

Why can remittances rise when an economy is struggling?

A remittance line that rises in a bad year surprises people, and there is nothing sentimental about it. Two mechanisms push the same way, and both are mechanical. The first is need. A household under strain has more to pay and less coming in, so it asks for more, and a sender who is answering an obligation answers the larger one. When a father's shop stays shut for two months, the son working abroad sends more that quarter, not less, and he does it for the same reason he was sending anything at all.

The second reason is arithmetic and has nothing to do with anybody's intentions. If the home currency weakens against the currency the sender is paid in, the same amount sent converts into more at home. A sender who transfers 1,000 Marut units home is sending Rs 80,000/- when the exchange rateThe price of one currency in units of another. Quote it the other way round and the same move produces a different percentage, so the direction of a quote has to be stated. stands at 80.00 Sankhya rupees per Marut unit and Rs 84,000/- when it stands at 84.00, and the sender did not send one unit more. Measured in rupees the line went up 5.00 per cent while measured in Marut units nothing happened at all.

Put those two together and the tendency follows: remittances often hold up or rise in exactly the periods when the return seeking inflows are falling. The tendency is not a rule, though, and it can fail plainly. If the sender is the one who loses work, the line falls whatever is happening at home, and no amount of need at the receiving end can conjure money that was never earned. Both mechanisms need the sender to still be employed.

What does the steadiness of remittances not promise?

An account of this line can quietly mislead, and it does it by praising the steadiness until the questions stop. The limit is worth stating plainly. The remittance line is steady because of what drives it, and not because anything protects it. No rule holds it up, no authority underwrites it and nobody has undertaken to keep it where it is. The line has three supports, and each one belongs to somebody else.

The first support is that people are employed somewhere else and are paid enough to have something left to send. The second is that the rules of that other place let them be there and let them work; those rules are written by people, and people change them. The third is that sending money home is cheap enough that most of what leaves actually arrives. Every rupee taken on the way is a rupee that never reaches the household. A line that has never moved much is not a line that cannot move, and the three reasons it has been steady are the same three things that could change it.

Read twice, that list is the whole of the caution. Left to right it explains why the line holds up. Right to left it is a list of what would have to hold for the line to keep holding up. Neither reading is more true than the other. An account that gives only the first teaches the reader to stop asking the second, and that is a worse outcome than never having read about the line at all.

What is a remittance not, and which two lines get it confused?

Two neighbours cause almost all of the confusion, and separating a remittance from each of them takes one question apiece. The first neighbour is investment. Money arriving to buy shares, bonds or a factory creates a claim: somebody now holds something, and that holding can be sold, repaid or taken back out. A remittance creates no claim at all. The household that receives it has borrowed nothing and issued nothing, and the sender is not holding an asset in the receiving country afterwards.

The second neighbour is primary income. Primary income records income earned on assets held across a border, meaning interest, dividends and profits, and the asset has to exist before the income can arise. A remittance is not the fruit of anything held in the receiving country. A remittance is earnings from work done in another country, given away to a household. A reader who files remittances under investment misreads both lines at once: the investment side gets inflated with money that could never be withdrawn, and the transfer side disappears from view exactly when it matters most.

Who reads this line in practice, and what do they read it for?

An analyst building a view of an external account treats the remittance line as the least volatile of the four and uses it as the yardstick against which the volatilityHow much a figure moves about from period to period. A line that swings widely is volatile; one that lands close to the same number each time is not. of everything else is judged, rather than as a number to forecast on its own. The practical version of that is a habit: when a current account moves, go and find out which line moved, and if the answer is the transfer line, treat it as unusual and go looking for the reason rather than filing it as ordinary variation.

A lender looking at a household whose income arrives from abroad does something similar and asks the same questions it would ask about a salary. Who employs the sender, in what country, under what permission, and what happens to this household if that work ends. Notice that these are the three supports from the block above, arriving as questions on a form. The line is used as a stability reference rather than a forecast. The questions worth asking about it are questions about the sender's employment, not about the receiving economy. A measure of what crossed a border is not a view about what to hold.

Sankhya and Marut are invented.
Educational material. Not advice on any investment, tax, budget or market position.