How will the instability in the Gulf impact India’s economy?
Political instability in the Middle East will likely have an impact on India. We have already seen how the uprisings in Egypt and Libya have affected the lives of the over 18,000 Indians living in that part of the world. The potential impact of the deteriorating situation in Bahrain will be far greater, where about 300,000 Indian expatriates live. GCC countries today are home to about 4.3 million Indians. This, of course, does not include the many undocumented (mostly blue collar) Indian workers in the region. In some cases (as in Dubai, which experienced an influx of workers in the last decade), the number of undocumented workers as a percentage of the total population of expatriate Indians will be considerable.
But beyond the potential effects to the lives of Indian citizens, political disturbances in the region will also have an impact on India’s economy. Today, remittances account for about 4% of India’s GDP (considerable, but not as high as other countries in the subcontinent). Remittances to India as a percentage of GDP have also (somewhat interestingly) increased over time, and with the liberalization of India’s economy (from 1.1% in 1985, 2.8% in 2000 to about 4% in 2008). As of 2008, the Gulf was the largest source of remittances to India at about 40%:
(Source of data: Reserve Bank of India)
Two important points need to be made here: first, while we already know that India leads other nations in terms of total dollar remittances ($46 billion, 2008), it does not include remittances made via hawala transactions. Since the September 11 attacks, the U.S. has worked with Gulf countries to strengthen their finance and banking regulations to ensure control over hawala transactions (which, by their very nature, have been helpful to terrorists to finance attacks against the U.S. and India). However, according to some estimates, hawala remittances to India from the Gulf are still pegged at about 30-40% of legal remittances. That would effectively put total remittances from the Gulf to India at at least $60 billion.
Second, when one considers remittances as a percentage of net state domestic product (NSDP), some states will likely be far more vulnerable to political uncertainties in the Gulf than others. According to a study published by the Centre for Development Studies, remittances to Kerala as a percentage of the state’s economy was at 30%. Further, per data published in the same report, it can be inferred that remittances from the Gulf alone can be pegged at about 28% of the Kerala’s economy.
While the most immediate impact of the repatriation of Indian citizens from a worsening situation in Bahrain could result in a momentary spike in remittances, as some suggest was the case during the first Gulf War, it will undoubtedly have a medium- to long-term impact on the economies of states in India that depend heavily on them.