1. Tap the remittance resource

Tap the remittance resource

Reducing cost of remittances, among other measures, will make India’s growth story inclusive in the true sense—touching Indians both within and outside the country.

By: and | Published: April 23, 2015 12:20 AM

A recent World Bank report has pointed out that India received $70.4 billion migrant remittances in 2014, surpassing China, the Philippines and Mexico, and has retained the top spot amongst remittance recipient countries since 2008. Remittances are money that migrants send back to their home country. According to the World Bank, there are 247 million migrants in the world, more than the population of Brazil. In 2014, $436 billion was received by developing countries by way of remittances. The World Bank expects this to grow to $440 billion in 2015 and further to $479 billion by 2017. Despite being the largest recipient country in the world, remittances into India slowed down in 2014, growing at an average rate of 0.6%, compared to 1.7% in the previous year. A stronger rupee might be, in part, responsible for the slowdown in inflows as migrants would wait and watch till they get a more favourable exchange rate.

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Remittances have played a key role in funding India’s current account deficit (CAD), which has remained in deficit during the past decade. The deficit, as a share of GDP, rose from 0.5% in FY01 to 4.7% in FY13, before narrowing to 1.7% of GDP in FY14, thanks to slowing domestic demand and curb on gold imports. CAD is not bad per se, if it is backed by a growing economy and is being funded by adequate and stable inflows.

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India happens to be the largest recipient of remittance inflows globally, thanks to a large Indian diaspora. Growth in inflow of remittances has also remained healthy, clocking an average of around 12.5% over the last 10 years. According to an RBI survey, North America and Gulf countries account for almost 71% of total remittance inflows into India. Most of these inflows are used for maintenance of families, followed by bank deposits.

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So far, remittances have remained a reliable source of foreign exchange to India. In the aftermath of the global financial crises during 2009-10, while FDI and portfolio investment contracted by 14% and 337%, respectively, remittances grew by 21.6%. According to RBI, “inward remittances in India have not been impacted significantly by the global economic crisis. This may be attributed to a number of factors such as depreciation of the rupee resulting in the rise in inflows through rupee-denominated NRI accounts to take advantage of the depreciation, hike in interest rate ceilings on NRI deposits since September 2008, and uncertainties in oil prices which might have induced the workers to remit their money to India as a hedging mechanism due to its relatively better growth prospects.”

To gauge the importance of remittances, let’s look at a few numbers. In 2013-14, remittances were 3.5% of GDP. They were sufficient enough to cover up for nearly 45% of India’s merchandise trade deficit. During the fiscal, India received $69.6 billion worth of remittances, while it received only $21.5 billion in FDI. If it were not for remittances, India’s CAD would have swelled to 5.1% of GDP from 1.7% in FY14. The relative importance of remittances is also expected to increase further, as growth in private capital flows to developing countries may moderate as interest rates begin to rise in advanced economies.

According to Dilip Ratha, an expert on migration and remittances, remittances act like insurance. Remittances, unlike private investment money, don’t flow back at the first sign of trouble in the country, and migrants send more money in troubled times. Also, money sent as remittances tends to be more effective, since unlike development aid money, it doesn’t go through official agencies, through governments, but reaches directly to intended recipient and often with business advice.

Given the economic and social importance of remittances, it is imperative to promote the inflows of the same. Despite substantial progress in the remittance market in the past decade, the provision of accessible, efficient and cost-effective remittance services in India could be improved. This is because these transfers often can be costly relative to the low incomes of remitters and the small amounts involved, especially in rural India. The average cost of remitting small amounts of money ($200-$500) from the UAE to India is 3.27%, and from the US it is around 3.52%.

India has been on the top of remittance race but it is yet to capitalise on it. With Prime Minister Narendra Modi’s increasing engagement with the Indian diaspora, the time is apt to tap into this valuable resource. The World Bank recommends floating of diaspora bonds to tap into the savings of the diaspora by offering them higher returns in the country of their origin. The World Bank’s estimates peg savings of the Indian diaspora at $44 billion, the third-largest amongst middle-income nations. Diaspora philanthropy is another means by which savings of the diaspora can be mobilised into their country of origin. India is a witness to such activities, particularly in case of temples. The government’s Swachh Bharat Abhiyan can go a long way in bringing in the diaspora’s money to fund the campaign. The World Bank also pointed out that the simplified portfolio investment regime might have diverted some of the investment-related remittances to stock markets. Though it is crucial to have a simple investment regime in place, emphasis should be laid on attracting more stable form of inflows—FDI and remittances. In this regard, RBI suggested various measures to improve the flow of remittances into India such as enhancing the outreach of distribution channels by including post offices in the electronic clearing and settlement systems, popularising online direct transfers to bank accounts, reducing cost of remittances and bank arrangements. Concrete steps in this direction will make India’s growth story inclusive in the true sense—touching Indians both within and outside India.

The authors are corporate economists based in Mumbai. Views are personal

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Tags: World Bank
  1. Y
    Yakov
    Apr 23, 2015 at 5:45 pm
    India is not just #1 global destination, but also the most compeive. Because Indian senders are by far the most educated migrant group, differently from other nationalities, they send money mostly via online and more providers compete for them, driving margins down. India also do lots more research to find the cheapest providers vs. other groups, so money transmitters have to compete based on price. E.g., USA-to-India has an average margin of about 2% with sending online approaching 0% - check with our app, . About 80% of all NRIs-POIs senders are doing so online. For more in-depth review of remittances to India, see this essment:
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