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Why India will feel greatest impact of oil prices

India is set to feel the greatest impact of the continuing oil price scenario, as remittances slump to below the 2008 financial crisis

In Qatar, Indians comprise the largest expat community, numbering around 545,000 and in 2013 Indians staying abroad sent $70-billion worth of money back home.
In Qatar, Indians comprise the largest expat community, numbering around 545,000 and in 2013 Indians staying abroad sent $70-billion worth of money back home.

India is set to feel the greatest impact of the continuing oil price scenario, as remittances slump to below the 2008 financial crisis.

The huge labour force working on Qatar’s mega infrastructure projects, readying the country to host the 2022 World Cup tournament as well as building the infrastructure due to be in place to fulfil the 2030 vision, has stoked the economy of their home countries.

Remittances from the GCC countries circulate billions of dollars, mostly to Asian economies like India and Pakistan, with approximately 23% of the world’s $400-billion remittances in 2013 coming from the GCC.

In Qatar, Indians comprise the largest expat community, numbering around 545,000, followed by Nepalis at 341,000 then Filipinos at 185,000, Bangladeshis with 137,000, Sri-Lankans comprising 100,000 and Pakistanis constituting 90,000 and other expatriates thereafter.

According to a report by The Hindu, an Indian national newspaper, in 2013 Indians staying abroad sent $70-billion worth of money back home. India uses this inflow to fund its current account deficit, so the revenue generation is vital to the economy, with the vast majority of this money coming from workers staying in Gulf countries.

In 2014, India’s net flow from remittances accounted for 3.1% of its GDP. This is balanced however by the fact that it is also one of the largest importers of oil in the world, with nearly 80% of its oil needs imported, accounting for one third of its total imports.

For this reason, the price of oil affects the country significantly and a fall in the price of this commodity drives down the value of its imports, helping to narrow its current account deficit.

According to a report by Livemint, a fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion, amounting to nearly 0.43% of the GDP.

Over the past two years India has benefited enormously from cheap crude, halving the oil import bill, cooling inflation and improving public finances, all of which helped the Reserve Bank of India (RBI) to cut interest rates.

However, the environment has changed drastically and over the past three years.

In the wake of the oil price drop all GCC countries are experiencing a weakening in their state revenues and, while they are doing their best to counter this, the spectre of lay-offs hovers in the wings, with one thousand Indian professionals laid off by Qatar Petroleum earlier this year.

A drop in recruitment for both blue and white collar workers is expected to increase throughout the Gulf region, with those in-country facing the very real prospect of being laid-off.

An analysis by industry body Associated Chambers of Commerce and Industry of India (Assocham), said that should this occur, the maximum impact will be in Kerala which, of the 20 million non-resident Indians (NRI) distributed throughout 110 countries and with some seven million in the Gulf countries, two million alone are estimated to be from Kerala.

According RBI’s balance of payments (BoP) figures, private transfer receipts, mainly representing remittances by NRIs employed overseas, primarily from the Middle East, declined by 7.5% to $15.8-billion in the October-December quarter, compared to $16.99-billion in the preceding July-September quarter in fiscal 2015-16.

“Essentially an improvement in the trade balance is being offset by worsening private transfers,” said Pronab Sen, country director for the UK-based International Growth Centre’s India programme.

Whereas 50% of India’s trade deficit in the previous two years was covered by remittances, only 40% was covered in 2015/16, even though the trade gap had shrunk significantly.

But it is not only the oil price that is denting India’s economy.

Chances of US interest rates rising, Britain voting to leave the European Union, and China’s economy worsening all pose risks for emerging markets like India and, although oil prices have recovered more than 50% since late January, the turn for the better could easily weaken before the labour market tightens in the Gulf once again.

Marie Diron, senior vice president of Moody’s Investors Service, warned there could be worse to come for remittances: “We have highlighted the risks of a marked fall in remittances as the Gulf economies’ long-term adjustment to lower oil prices has only just started,” she said.

Nevertheless, despite the drop in remittances, economists forecast a balance of payments surplus close to $25-30-billion for 2015/16, as foreign direct investment flows into the world’s fastest growing major economy, with foreign exchange reserves recorded at $361-billion on 13 May 2016.

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