A case for including migrants' remittances in inter-state comparisons

  • Blog Post Date 21 June, 2013
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Chinmay Tumbe

Indian Institute of Management, Ahmedabad (IIM-A)

Gross State Domestic Product, a widely used measure to compare incomes across states in India, does not include migrants’ remittances. This column argues that remittances have a bearing on drawing valid inter-state comparisons, especially for high-remittance receiving states like Kerala, Punjab and Goa, and on deliberations on fiscal federalism.

Imagine an island with a large non-working population whose economic transactions are mainly supported by migrants’ remittances. In such a world, the incomes generated per head or per capita gross domestic product of the island would be minimal due to the absence of major economic activities. And yet this would have no bearing on the actual welfare of the islands’ residents whose disposable incomes per head could be substantially higher due to migrants’ remittances. As this case suggests, migrants’ remittances need to be considered in any regional welfare comparison and more so, when economies are heavily dependent on migrants’ remittances.

India is the largest recipient of international migrants’ remittances and hosts the second largest domestic migrants’ remittance market in the world. At the all-India level, National Disposable Income has been around 4% higher than National Income mainly on account of Migrants’ Remittances. However, at the regional level, since the volume and nature of remittances varies across states, could it be the case that state disposable incomes differ significantly from state income measures?

Estimating state level remittances and disposable incomes

Until recently, state level estimates of migrants’ remittances had not been computed due to the paucity of data. However, the 64th round National Sample Survey (NSS) in 2007-2008 for the first time collected information on domestic and international remittance volumes, enabling a state level analysis. From the NSS data, the size of the domestic household remittance market can be estimated to be $10 billion, 60% being inter-state transfers. Uttar Pradesh (24%), Bihar (17%), Rajasthan (12%), West Bengal (7%) and Orissa (6%) received the bulk of inter-state migrants’ remittance flows while Maharashtra, Delhi and Gujarat were the major source regions of these remittances.

State level international remittance flows can be estimated by a combination of NSS and Reserve Bank of India (RBI) data on Non-Resident Indian (NRI) deposits. Total international remittance flows amounted to over $40 billion and the three states of Kerala, Punjab and Goa received an estimated 40% of these flows. Together with domestic remittance flows, a measure of net remittance inflows for each state can be assessed and by adding this to the Gross State Domestic Product (GSDP) a measure of Gross State Domestic Disposable Income (GSDDI) in 2007-2008 can be derived.

Difference between state income and state disposable income

Comparing GSDP and GSDDI of states produces striking results for certain states. Kerala, Punjab and Goa, which receive abundant international remittance flows, had GSDDI higher than GSDP by 30%, 10% and 18% respectively. GSDDI was also higher than GSDP by roughly 6%, 4% and 3% in the relatively poorer states of Bihar, Rajasthan and Uttar Pradesh respectively due to net domestic and international remittance inflows. In Maharashtra, Gujarat and Karnataka, foreign inflows were partly offset by money leaving the states through inter-state transfers and the difference between GSDP and GSDDI was under 4%.

The results for Kerala are particularly interesting. For instance, it’s ranking among 27 states (excluding Goa) moves up from the sixth position on the basis of per capita GSDP to the first position on the basis of per capita GSDDI. One implication of this is that if states were compared on the basis of disposable incomes, Kerala would not appear to be an exception for achieving certain social indicators at a relatively lower GSDP, for it has the necessary disposable income to achieve the same.

Apart from Kerala, the difference between GSDP and GSDDI does not drastically alter state rankings obtained using per capita GSDP. However, the difference between income and disposable income alters the measurement of ‘income distance’ between states. For example, Goa and Bihar remain the richest and poorest states respectively on the basis of both per capita GSDP and GSDDI. But while Goa’s income (GSDP) is nine times higher than Bihar’s income, its disposable income (GSDDI) is nearly 11 times higher than that of Bihar. Such differences are significant for fiscal federalism in India.

Implications for fiscal federalism

The determinants of states’ shares of Union taxes have been an important theme in Indian fiscal federalism. Fiscal capacity equalisation has been one of the guiding principles in determining these shares. Since poorer states tend to have lower fiscal resources, various Finance Commissions have allocated higher per capita transfers to poorer states in order to achieve horizontal equity. To do so, a measure of ‘income distance’ based on differences in per capita GSDP has been used to proxy the fiscal capacity distance between states. This indicator received a weightage of 62.5%, 50% and 47.5% in the 11th, 12th and 13th Finance Commissions respectively for determining states’ shares of Union taxes.

Per capita GSDP income estimates, to a certain extent, do serve as useful proxies of states’ fiscal capacities. However, they do not account for migrants’ remittance flows that affect the spending capacities in states and alter the taxable base.

Migrants’ remittances boost household disposable incomes such that additional expenditures or investments can be incurred. When they are spent on consumer goods, they boost state level sales taxes. When invested in land markets, they boost stamp duties and registration fees collected by local and state governments. If out-migration from a state is not accompanied by corresponding in-migration, it can shrink the labour force and reduce the production capabilities of the state. This would correspondingly reduce the contribution of the state to the volume of excise duties and corporation taxes collected mainly by the Union government. International migrants do not pay income taxes in India so that states with large out-migration also contribute less in terms of income taxes collected by the Union government. This is not compensated by investments in NRI deposits as they are, to a large extent, tax-free. To sum, migration and remittances boost state level fiscal capacities and may even reduce the states’ contribution to the Union government. tax collections.

It follows that a measure of state disposable income that incorporates migrants’ remittances is a more appropriate indicator of fiscal capacity than state income. Using per capita GSDDI rather than per capita GSDP in the measure of ‘income distance’ would be a more accurate proxy of fiscal capacity distance. This can lead to substantial changes in the states’ share of Union taxes given the large weightage placed on the ‘income distance’ indicator. In particular, the shares of Kerala and some of the richer states with remittance-augmented disposable incomes will go down and the share of poorer states, especially the North-Eastern states, will go up.

It is interesting to note that the Kerala government in an official report has already stated that remittances considerably boost its fiscal resources vis-à-vis states that do not receive such remittances. It remains to be seen whether the 14th Finance Commission seriously considers the issue of migrants’ remittances in its deliberations over the next one year.

Further Reading

  • Rangarajan, C and Srivastava, D K. 2011. Federalism and Fiscal Transfers in India. New Delhi. Oxford University Press. [pg. XV for reference to remittances].
  • Tumbe, Chinmay .2011. “Remittances in India: Facts and Issues.” Indian Journal of Labour Economics 54(3): 479–501.
  • Tumbe, Chinmay. 2012. “Measuring Migrants’ Remittances in Regional Accounts: Concept, Measurement and Implications.” Mimeo [Available on request].
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