In many Indian homes, part of the monthly budget is decided thousands of kilometres away. A salary earned in New York pays the electricity bill of ageing parents in Pune. A nurse in London helps cover hospital bills in Malappuram. A child in Darbhanga goes to school because his father sends money home every month from Kuwait.
For millions of families, these foreign remittances quietly keep everyday life running. But when such inflows become this large and continuous, they shape the economy in unexpected ways, sometimes even hurting parts of it over time.
Introducing 'Dutch Disease'
In the late 1950s, after years of failed drilling attempts, the Netherlands discovered a massive natural gas field near Groningen, making the country richer. But there was a catch.
Gas exports brought in huge foreign revenues and strengthened the Dutch guilder, making other exports less competitive. The energy sector attracted a lot of investments, while others, not so much. By the 1970s, the manufacturing sector weakened and unemployment spiked. The Economist called this phenomenon "Dutch disease."
When large amounts of foreign money enter a country, people spend more on properties, construction, restaurants, transport, shopping, and local services. Over time, more businesses and workers get attracted to these fast-growing areas because of higher returns. Other exporting sectors, especially manufacturing, lose interest and investment. That's the Dutch disease.
India's Experience With Disease
While the term originally came from oil and gas discoveries, economists see similar patterns in countries receiving large remittance inflows, such as India.
This is how it works. When people send money to India from abroad, the rupee tends to strengthen in real terms. That sounds positive. But a stronger currency makes exports less competitive because Indian goods become relatively more expensive in the international markets.
Even the spending patterns of families that receive this money change over time. Much of it goes into housing, land purchases, construction, retail, transport, education, healthcare, and local services rather than entrepreneurship, factories or exports. That creates local booms in real estate and services, but other sectors get ignored.
The Dutch Disease in Keralam
Keralam is seen as the clearest Indian example of this shift. In FY24, it received $23 billion in remittances, which is 17% of its GDP.
Gulf migration after the 1970s oil boom transformed the state economy. Family incomes rose, lifestyles upgraded, and real estate demand touched north.
But this also changed labour markets. As remittance-receiving families became richer, they rejected lower-paying manual jobs. Agriculture and small manufacturing sectors could not find cheap labour within the state. That resulted in the migration of workers from poorer Indian states.
Researchers also point out that much of the money flowed into consumption and housing rather than productive business investment. That is one of the reasons why the state lags in manufacturing.
Not Simple 'Good or Bad' Story
On a macro level, however, the picture is not negative. Thanks to 19 million Indians living overseas, India received a record $137 billion in remittances in 2024, more than 14% of global remittance flows.
Inward remittances have improved household welfare across India. They finance education, healthcare, housing, and consumption, while reducing poverty. They account for 3-4% of India's GDP and provide a cushioning effect to the current account balance, which is usually in deficit in India.
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Final Take
The rupee has been depreciating against the dollar in the last decade. Without remittances, our current account deficit would have been wider, and the global shocks would have hit us earlier and harder. Remittances partially offset that pressure by bringing billions of dollars into the country every year.
But as with most things in economics, there is no free lunch. Such massive inflows come with trade-offs. While they help in household finances and support the external account, the Dutch disease phenomenon tells us that they reshape incentives and impact local economies in ways policymakers cannot ignore.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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