An Economic Analysis of Remittances and Inequality

By Naisha Luthra

It is June 12th, 2024, 4:30 a.m.. A fire breaks out in a six-story building located in the coastal city of Mangaf in southern Kuwait. The building housed many low-income immigrants, a majority of them Indian citizens. Amongst the 200 individuals packed inside the small apartment building, 50 lost their lives, leaving the rest to share their stories about the dangerous living and working conditions they are subjected to daily. According to Human Rights Watch, for low-income migrants in Gulf countries like the United Arab Emirates (UAE), Saudi Arabia, and Kuwait, hazardous working conditions, long hours, unpaid wages, and cramped and unsanitary housing are simply reality. These workers come to the Gulf under the Kafala system, which allows private companies and citizens to have full control over the immigration status and working conditions of their employees. This brings into question why Indian workers still make upwards of 30 percent of the expatriate workforce in the Gulf Cooperation Council (GCC). Why do upwards of 8 million Indian workers leave their homes to live a life of discomfort and hazard? The answer lies in India’s economic landscape.

The Indian economy is marked by striking inequalities, with high poverty levels serving as a push factor for migration. Approximately 90 to 92 percent of workers in India are part of the informal sector, which operates outside official regulatory frameworks and lacks formal job security and benefits. The informal sector includes jobs like agriculture, street vending, construction, and domestic work, which are generally labor-intensive and unstable jobs. The alluring promise to get away from this uncertainty pushes Indians to migrate. Historical ties between India and the GCC, due to colonial trade routes, also facilitate this movement.

Despite the hazardous nature of unskilled and semi-skilled jobs in Gulf countries, as well as unsatisfactory housing conditions, many Indians, especially men, are drawn by the prospect of significantly higher salaries. Almost all of these workers send their salaries back home to India as remittances, which play a critical role in supporting Indian households. For instance, in the state of Kerala, remittances accounted for 23.2 percent of the state’s GDP in 2023. By boosting household consumption in these areas through remittances, migrant workers boost their local economies, without returning to the country for years at a stretch. This triggers a ripple effect that increases the aggregate demand in specific regions, which ultimately increases India’s GDP. 

Conversely, one counterargument presented by critics explains how remittances don’t always have a positive macroeconomic impact because they are used for basic consumption instead of for procuring productive assets. Essentially, while they may aid families in the short run, there is no true benefit in the long run. Furthermore, economic costs aside, migration to the Middle East often entails high human costs, including unsafe living conditions, wage theft, and minimal labor protections. In a survey, 62 percent of Indian migrant workers said they experienced depression, and 77 percent experienced loneliness. The number of deaths due to poor conditions has also risen in recent years, especially following Qatar’s 2022 FIFA World Cup Tournament. Heat-based illnesses from working in extreme summer heat and suicide were the major causes of death among the 6500 lives that were lost since Qatar first won its World Cup bid. The conditions of these workers during the World Cup were likened to modern slavery.

While remittances support India’s economy, labor issues could create diplomatic tensions, compelling India to advocate for better treatment of its nationals. India has introduced policies like the Pravasi Bharatiya Bima Yojana (PBBY) insurance scheme and migrant worker welfare funds to protect its citizens abroad. Under this scheme, all workers in the GCC are given mandatory life and health insurance. Still, the Indian government has been criticized for dealing with this problem on a reactionary basis, instead of trying to find a long-term solution. To see tangible change in the lives of migrant workers, the Indian government and Gulf countries must work together to create concrete policies to standardize contracts in the private sector. There needs to be an open discussion about the Kafala system and its dangers to bring the plight of thousands of migrant workers to light. However, enforcing such initiatives is a challenge, as an excess of interference may create tensions with the Gulf nations, making it a tradeoff between human security and economic well-being for India.

This piece is a reproduction from its original issue in Hemispheres Volume 48 Issue 1. Read more here.