Diaspora dollars: be thankful for non-residents sending money home but let’s not taken these flows for granted

Subscribe to enjoy similar stories.Prime Minister Narendra Modi’s call for Indians to help conserve foreign exchange in various ways, such as by holding off on foreign travel and using less fuel, made waves as news partly because it has been more than a decade since India’s external sector was last under pressure. With crude trading above $100 per barrel globally, our oil imports are soaking up dollars even as exports face protectionist headwinds. Ever since war erupted in West Asia, it has been clear that its adverse effect on our balance of payments (BoP) would need to be kept under watch.

Now that Indian residents have been asked to help keep the country’s forex expenses low, it is hard to estimate the reduction that may follow. Thankfully, in such times of flux, the Indian diaspora has usually stood by us, providing a steady source of forex and aiding our BoP stability. As with many other developing countries, India typically runs a current account deficit (CAD).

The latest Economic Survey shows how our merchandise trade deficit is offset by strong net inflows of invisibles, led by widening surpluses in service exports and private transfers. Such a deficit can be run both smoothly and justifiably if those ‘extra’ imports serve us well, so long as the gap is small enough for capital account inflows to finance, thus keeping the overall BoP steady. A CAD under 2.5% of GDP is usually considered safe.

However, we happen to have a capital crunch too. Portfolio flows into Indian shares from abroad have been in reversal mode and net foreign direct investment (FDI) levels weak. Prospects of an imminent recovery on the capital account look modest at best.