Prelims: Current events of national and international importance | Economy
Why in News?
Recently, India received workers’ remittances crossing USD 100 billion in a year, which cushioned the Balance of Payments amid weak FDI/FPI inflows and capital outflows.
- Balance of Payments (BOP) – The BoP record the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year.
BoP follows the Double Entry System to record transactions with the rest of the world and has two sides – Credit side and Debit side
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BoP Surplus
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Balanced BoP
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BoP Deficit
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Credit Side > Debit Side
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Credit Side = Debit Side
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Credit Side < Debit Side
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- Remittances – Money sent home by Indians abroad and it forms more than 2/3rd of private transfers.
- Private Transfers – Broader category including remittances, withdrawals/redemption of NRI deposits, personal gifts/donations, and gold/silver brought via passenger baggage.
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FY 2026
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Workers’ remittances – 110.47 billion (26% increase from FY25).
Private transfers – 151.71 bn (15% increase).
Net transfers – 144.07 bn (16% increase).
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Impact of Remittances and Private Transfers
- Immediate Cushion – Helped offset weak Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) outflows.
FDI – Long‑term capital inflow giving ownership/control over assets (e.g., factories, land, companies).
FPI – Short‑term capital inflow in financial assets (shares, bonds) without management control.
- Rupee Management – RBI buys foreign currency inflows (USD, etc.) to add to reserves and prevent excessive rupee appreciation, keeping exports competitive.
- Reserves Role – Forex reserves act as insurance against external shocks, Current Account Deficit (CAD) pressures, and volatile capital flows.
CAD – It occurs when a country's total imports of goods, services, and transfers exceed its total exports.
- Rupee Depreciation – When INR weakens against USD or other currencies, the value of each dollar sent home rises in rupee terms.
- Limitations – Remittances are not a long‑term fix, FDI/FPI must improve, trade deficit needs management.
Drivers of Surge
- West Asia Conflict – Remittances grew as workers sent extra money home due to uncertainty.
- Rupee Depreciation – Encouraged sending more foreign currency since it converted into higher rupee value.
- Shifting Sources – Gulf share fell from 47% (2016‑17) to 38% (2023‑24), while contributions from the US and UK increased.
Reference
Indian Express | BoP
