Kerala-God's own country?: 2009

Reverse Exodus: Gulf Workers Return to India, Bringing New Travails

Published: June 04, 2009 in India Knowledge@Wharton

In March, Dhananjay Datar, promoter of the US$50 million United Arab Emirates-based Al Adil Trading Co., celebrated the 25th year of his business. He hired a Boeing 737 and circled Dubai for several hours as 50 guests popped champagne and ate cake. After touchdown, he presented his wife, Vandana, with a US$2 million Rolls Royce Phantom.

Around the same time, other Boeing 737s were ferrying laid-off Indian workers back from Dubai to Thiruvananthapuram, Kozhikode and Kochi, principal cities in the southern Indian state of Kerala. They hope to return, but at the moment it doesn't seem likely.

Some 200,000 to 500,000 Keralites working in the Gulf are likely to return home by midyear, state finance minister T.M. Thomas Isaac told the State Assembly recently. This is a considerable chunk of the estimated two million-plus Keralites working abroad, nearly 90% of them in the Gulf. The 2001 census put Kerala's population at 31.8 million. Non-resident Keralites (NRKs) send back close to US$8 billion in remittances annually, more than double the state's tax revenues. The impact of the reverse exodus -- both economically and socially -- could be devastating, according to experts.

"There will naturally be a considerable negative impact on Kerala, as the remittances will stop and the number of unemployed will increase simultaneously," says Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB). "Socially, adjusting to the returnees will be a problem. They would be quickly perceived as liabilities as opposed to assets, affecting both them as well as the residents."

The reasons for the reverse migration have been well-documented. The Gulf economy has been suffering after the crash in oil prices. Dubai has been hit particularly hard because it was the region's key financial center, and finance has taken a backseat amid the global economic slowdown. "It is mainly the real estate and property segments along with bankers who have been hard-hit," says Datar of Al Adil Trading. "The other businesses are not doing too badly. They may be down by 15% to 20%." Adds Faisal Shamsudheen, a Dubai-based journalist-turned-PR manager who lost his job in the crisis: "Construction and banking are the worst hit. Mass redundancies are happening by the day in the private sector and semi-governmental organizations."

The bulk of the NRKs were working in construction. "The Gulf has been a significant employer in blue-collar jobs and the worker class," says Narayanan Ramaswamy, executive director, KPMG Advisory Services. "That influx will come into India." People have left other Indian states for jobs in the Gulf, but in much lower numbers. (Labor migration from states such as Uttar Pradesh and Bihar has more often been to richer states such as Gujarat and Punjab.) Kerala will bear the brunt.

Kerala's Main Export Commodity

"The main commodity which Kerala exports to the Gulf countries is manpower," says Ajay Kumar, chairman of the Kerala State IT Mission and secretary of IT. "They have been engaged in the construction, real estate and tourism sectors, which have been badly hit by the global slowdown."

Ramaswamy notes that Kerala's rule by a Left alliance may create additional problems. "One of the things this will definitely cause, especially in an economy like that of Kerala, with its Communist flavor, is more unrest," he says. "Jobs will be affected. Unions will protest. If this continues for the medium to long term, it will also lead to law-and-order problems."

Though some observers sense disaster, authorities don't seem particularly concerned yet. "The Dubai government is still in a denial phase and continues to repeat that there is no mass exodus of Indian workers," says Shamsudheen. The Center for Development Studies (CDS), in Thiruvananthapuram, said in a report this year that there was no cause for worry. The main conclusion of the report, the Kerala Migration Monitoring Study 2008, is that "as of December 2008, there is neither any indication of a significant slowdown of emigration from the state nor any large-scale increase in return emigrants to Kerala." Authors S. Irudaya Rajan and K.C. Zachariah acknowledge, however, that the situation may have changed in 2009. But not all return migration is related to the recession, they say.

According to the CDS, the number of emigrants from Kerala in 2008 was 2.16 million, up from 1.84 million in 2003. The number of return emigrants was 1.1 million in 2008, up from 890,000 in 2003. So return emigration rose only 210,000, compared with an increase of 320,000 outward-bound. "I don't think there is a crisis," says Rajan, who is chair professor in the research unit on international migration and a fellow at CDS. "A few hundred people may have lost their jobs. But what are they among the two million [Indians] in the Gulf?" Shamsudheen also points out, however, that these figures were calculated before the economic crisis struck the region.

And some data can be misread. Take remittances, the lifeblood of the Kerala economy. According to K.V. Shamsudheen, chairman of the Pravasi Bandhu Welfare Trust, a UAE-based charitable organization working for the welfare of expatriate Indians, NRKs have remitted more than US$42 billion to Kerala in the last 35 years. Weekly newsmagazine India Today reports that non-resident external deposits with Kerala banks, which were US$6.73 billion in June 2008, are expected to cross US$7.39 billion by June this year. Adds Binoy Augustine, manager of the Tiruvalla branch of Federal Bank, which has one of the largest numbers of NRK accounts in the state: "In the past two months, we have seen a surge in NRI remittances thanks to the favorable exchange rates." This boom in remittances is considered good news; it's business as usual.

Coming Home Permanently

Others, however, say that returning NRKs are closing their accounts in the Gulf because they are coming home permanently. The spike is also attributable to the more expensive dollar, which makes it attractive to convert to rupees, and the migration of accounts from foreign banks, perceived as risky, to Indian public-sector banks. Such a surge cannot continue.

A Planning Commission report submitted recently to the Union government suggests as much. Remittances could decline by 20%, the report says. As workers abroad return to India, "they may bring back their accumulated savings and a one-time increase may take place. During 2009-2010, private transfers can be between US$35 billion and US$50 billion."

A World Bank study reaches a similar conclusion. "Cash remittances to developing nations sharply slackened in the last few months of 2008 because of the global financial distress, and they are projected to continue their slowdown this year," the report says. "Their lower growth in 2009 will likely be a result of the global crisis, the downward impact of the oil price collapse on the Gulf economies and the uncertainty about exchange rates.... The growth of remittance flows is expected to slow significantly from 6.7% in 2008 to 0.9% in 2009, but could recover in the medium term to 6.1% growth in 2010."

Although Kerala may suffer the most, the decline could hurt the entire economy. India gets the highest remittances of any country in the world (US$27 billion in 2007; US$32 billion in 2008). This is estimated to add 3% to GDP. "The slowing down will hurt particularly as it comes coupled with the reversal of portfolio capital flows," says Chakrabarti. "Together, this could hurt both the exchange rate, making the rupee weaker, and the asset markets, particularly the real estate market." The euphoria following the formation of a new, stable government may dilute this effect. The rupee is strengthening and foreign portfolio investments have resumed. But remittances have always been long-term money, while foreign investments in Indian equity, as the last year shows, can be fickle. Total foreign direct investment in India in 2008-09 (April to March) was around US$27 billion, while portfolio investments stood at a negative US$15 billion as foreign institutional investors pulled out.

The government won't acknowledge the potential for a crisis. In Dubai recently for the inauguration of a new campus of the Ghaziabad-based Institute of Management Technology, former commerce and industry minister Kamal Nath rejected a suggestion that the government work out a loan or grant scheme for Gulf workers who had lost their jobs. This has been a demand of the Pravasi Bandhu Welfare Trust, which earlier appealed to Prime Minister Manmohan Singh to have the government provide US$2,000 each to workers who had to return after losing their jobs. Nath instead said India had plenty of jobs.

"The government can't fund any rehabilitation or relief packages for its expatriate Indian community," Nath said, according to the Abu Dhabi-based newspaper The National. "However, Indians facing losses should return and find new opportunities back home. Industries like IT continue to grow in India, and business is looking positive."

But, as in other parts of the world, job losses have been considerable in India. Nath's optimism notwithstanding, having special schemes to provide jobs for returnees may invite problems. "To the extent that some of the returnees will have prior experience and skills, the government may be able to help them find employment, but any 'special efforts' directed at them will also cause social heartburn," says Chakrabarti. "So efforts, if any, should be kept low-key." Adds Ramaswamy of KPMG: "The government should take some measures. But this business of providing direct employment could just be more emotional talk. The way they should provide employment is to hasten some of the infrastructure projects and start investing in capital-intensive projects."

Financing for Repatriated Entrepreneurs

Those are big-ticket items. The Kerala government, meanwhile, is thinking small. It has announced a US$200 million entrepreneurship package for repatriates. This, finance minister Isaac says, is not a dole program. The money will go to the state-owned Kerala Financial Corp., which will borrow six or seven times that amount from the market. The principal will be used to finance entrepreneurs.

Kumar of the State IT Mission says the technology sector offers employment potential. "There is hope in the IT sector, which seems to be growing despite the economic slowdown. The growth in IT in Kerala is likely to be much more than the national average." Because of pressures on costs, IT companies will move to Tier 2 and Tier 3 cities, he predicts. Kerala has enough of those and an additional edge because of "the best social infrastructure and highest physical quality of life." The government has a three-pronged plan to make Kerala an IT destination: Build infrastructure, develop human resources and focus on marketing the state. "There is a hidden opportunity for Kerala," Kumar notes.

There is a problem, however. Keralites work hard when they go out of the state to seek their fortune; at home, they seem to lack the same discipline. "Keralites are ready to do any job once they cross the state border," says Rajan of CDS. "But [at home] there is a kind of self-created social unemployment." Opportunity exists nonetheless. "There is a scarcity of workers in Kerala. If you notice, in Thiruvananthapuram city alone there are thousands of workers from other parts of India and even from Nepal."

The Kerala crisis raises issues that are larger than the impact on the state. India was supposed to benefit from a "demographic dividend." India's young workers would provide muscle as other countries turned gray. Has this theory -- and therefore India's growth prospects -- suffered a setback? "It is temporary," says Chakrabarti of ISB. "The jobs crisis is global, across countries. In the end, India will still be among the fastest-growing countries in the world. Hopefully, by 2011, 2012, the dust will settle, and by then India will also be able to get back on track for growth."

A related issue is protectionism, particularly in the labor market. Western countries have begun making noise about this as they try to preserve jobs for their own nationals. But Chakrabarti is optimistic. "These protectionist tendencies will be short-term," he says. "But if the slowdown becomes a very long one, the protectionist pressures may cross certain political thresholds, which may lead to the world going the protectionist way for decades to come." Adds Ramaswamy: "Protectionism is an emotional response and can only be a short-term phenomenon because the world has moved a long way from where we were during the last recession. The impact of the Gulf slowdown on India is only an indirect one, so we don't need to be overly concerned. Even the people who are coming back will return to the Gulf once the economy picks up."

It has happened before. During the Iraqi invasion of Kuwait, there was an exodus of Indian workers from the war zone. "It was a fast turnaround for Kuwait after the Gulf War, considering the devastation and exodus the country saw with the Iraqi invasion," says Shamsudheen, the PR manager. "Almost all Kuwait returnees went back after the country was liberated, and there were more opportunities with the reconstruction projects."

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