Economic Contraction Across the Gulf Chokes the Flow of Remittances to South Asia

Spend any time in a principal city of the Gulf Arab states, and there’s a common thread: large populations of South Asian laborers, clerks, bankers, consultants, tech workers, journalists, service staff, medical professionals, and even billionaires who have built retail, service, or industrial empires.

From the engineer working at a Dubai airport to the receptionist checking in guests at a hotel in Muscat to the laborers building new stadiums in Doha, the accountant punching in numbers for a trading firm in Jeddah or the retail mogul in Abu Dhabi building hypermarkets across the region, South Asians have become ubiquitous and vital contributors to the economic growth and development of Gulf Arab countries. While difficult to quantify, it is hard to imagine the growth and development of the region over the last four decades without the professional and service skills and labor of South Asian migrants – not to mention their consumer spending.

South Asian economies have also benefited from decades of migration to the Gulf Arab region, particularly in the form of remittances from expatriate workers. According to an examination of World Bank bilateral remittance figures, more than $78 billion of remittances flowed from the Gulf Arab states to South Asia in 2018. This accounted for 60% of all remittances received in South Asia for the year and nearly 15% of all remittances worldwide to low- and middle-income countries. Over the past decade, the Gulf Arab-South Asia remittance corridor has become one of the most consequential in the world.

Remittances are the largest source of foreign currency earnings in low- and middle-income countries, far outpacing official foreign aid and direct investment in virtually every emerging and developing country. South Asia is the second-largest remittance receiving region in the world, while India is the single-largest country recipient, clocking in at $83 billion in the year 2019, according to World Bank data. Two countries alone – the United Arab Emirates and Saudi Arabia – account for nearly 40% of all remittances to South Asia, and the UAE accounts for nearly one-quarter of all of India’s remittances, according to calculations made from World Bank data.

Remittances are a vital piece of the development puzzle worldwide. Citing numerous studies, the World Bank notes remittances “alleviate poverty in lower- and middle-income countries, improve nutritional outcomes, are associated with higher spending on education, and reduce child labor in disadvantaged households.” In Kerala alone, one of India’s most prosperous states, one in four households is supported by remittances, which account for more than five times the amount of money derived from the central government to the state. Local studies have also demonstrated that Kerala families with migrants in the Gulf tend to engage in higher consumer spending than those without migrants.

Of course, South Asia-Gulf ties are about more than remittances and diaspora labor. The Gulf Arab states are the largest trading partners for both India and Pakistan, according to an examination of recent International Monetary Fund data. Gulf Arab states have also become main sources of infrastructure investment and remain steady suppliers of oil and gas. Meanwhile, Dubai has emerged as the Hong Kong of South Asia, with some 17,000 licensed companies of Indian nationals registered with the Dubai Chamber of Commerce. Airports in the UAE have become India’s gateway to the world: Nearly one in three international flights that depart from or land in India flow through the UAE. Indian nationals are also the top foreign investors in Dubai real estate and the leading tourist nationality, with nearly 2 million Indians visiting the emirate in 2019. Pakistanis are not far behind in real estate investment and are the third-largest foreign investor in Dubai property. Before the coronavirus pandemic, some 200 flights per week flowed between Pakistan and the UAE.

The World Bank estimates that global remittances will decline by some 20% worldwide in 2020 due to the pandemic. This amounts to “the sharpest decline in recent history” and will, according to the World Bank, represent “a loss of a crucial financing lifeline for many vulnerable households.” For South Asia, the World Bank forecasts a 22% decline, although, given the proliferation and speed of downward revisions over the past month, an even sharper fall might be expected.

All of this spells further trouble for South Asia, which is facing its worst economic slowdown in four decades. The World Bank notes that the region will see economic growth of 1.8% to 2.8% this year, a sharp drop from the robust 6.3% projected a few months before the coronavirus pandemic – and the worst economic numbers in four decades. As for the Gulf Arab states, the IMF predicts an aggregate economic contraction of 2.7% in 2020, a severe test for the South Asian migrant community, particularly laborers and service staff, as job cuts have already begun.

This test will be faced at a time of growing geopolitical ties between the Gulf Arab states and South Asia, particularly India. The geopolitics has finally caught up with the geoeconomics. Heads of state and senior official visits have markedly risen over the past five years, more accurately reflecting the gravity of the commercial relationship. Prime Minister Narendra Modi has visited the Gulf Arab region more than any other Indian prime minister. Abu Dhabi Crown Prince Mohammed bin Zayed al-Nahyan was chief guest at India’s Republic Day in 2017, and images of Crown Prince Mohammed bin Salman of Saudi Arabia and Modi hugging and smiling in Riyadh, Delhi, or at a G-20 summit have become common.

As for Pakistan, Islamabad no longer holds its privileged position in the Gulf as the “Muslim brotherly country” of South Asia to the detriment of India, but Prime Minister Imran Khan has also engaged in personal diplomacy with key Gulf Arab leaders to secure aid, investment, or support. These relationships will be tested as more Pakistani and Indian laborers and service professionals will need support and possibly repatriation amid the carnage of the economic freeze caused by the coronavirus pandemic.

South Asian states should be looking closely at the fate of the UAE. Though a small country of fewer than 10 million people, it accounts for more than one-quarter of Pakistan’s remittances and nearly one-quarter of India’s. It is also India’s third-largest trade partner, after the United States and China, and the South Asian giant’s second-largest export destination, according to recent IMF trade figures. As for Pakistan, the UAE is the country’s second-largest trade partner after China.

The UAE has also emerged as a leading trade, transit, and tourism hub for South Asia, with a large number of flights crisscrossing the Indian subcontinent into and out of the principal air hubs of Dubai, Abu Dhabi, and Sharjah. UAE ports have become key logistic hubs for ships headed to South Asia. UAE entities have also become major investors in South Asia, ranging from DP World, the Dubai-based global ports operator, and Dubai-based real estate firm, Emaar, to Abu Dhabi-based investment powerhouse Mubadala and the Abu Dhabi National Oil Company. The UAE also hosts a large Indian population, accounting for more than one-quarter of the country’s total, while more than half of the population hails from South Asia.

While many factors remain at play, one thing is clear: The Gulf Arab region and South Asia have a highly interdependent relationship, one that has delivered benefits for both sides. So, as the region stumbles, South Asia will feel the pain.

The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.