G20 summit: India must push for lower remittance costs

Updated: November 21, 2014 3:48:44 PM

Continued attention from G20 members is needed for further improving remittance flows

At the upcoming G20 summit (on November 15-16), the government of India is expected to lobby for significant slashing of the cost of sending remittances by overseas workers to their home countries. These costs can be as high as 10% of the total amount remitted; thus, a net loss both to the overseas worker and the recipient country. India will do well to raise this issue that is not only important to itself but to a number of emerging economies like the Philippines and all of India’s South Asian neighbours.

For some of these countries, remittances account for as much as 20% of the GDP. So, we are talking substantial numbers here. Moreover, this is one issue which the G20 can actually address as all the principal actors are members of the Group. This will help improve its track record in achieving results, which has been quite abysmal so far. Therefore, other members would do well to pay heed to the Indian prime minister’s submission at the summit.

A key source of  external earnings According to the World Bank, total remittances in 2013 by migrant workers, to their parent countries were a massive $413 billion. This is three times the size of the total development global aid money. India, with the world’s largest migrant worker stock of 14 million people, is expected to remain the top recipient of remittance flows among developing economies in 2014, ahead of China and the Philippines. India will account for 16% of $435 billion remittance flows to developing countries and 12% of the worldwide flow of $582 billion in 2014.


Remittances are important and stable source of private foreign earnings inflows for India as they bring in large amounts of foreign currency that help cover substantial part of our merchandise import bill. Remittances have surpassed foreign direct investment (FDI) flows over the years, financing about 47% of the merchandise trade deficit in FY14. Interestingly, these have been almost as high as earnings through telecom and software services exports and three times more than the FDI flows in FY14.


It is seen that remittance flows increase and provide income insurance for families which often face hardships. Remittances also reach the recipients directly and need not go through official agencies or government like aid money.

The global financial crisis had limited impact on remittance earnings for India as falling asset prices, rising interest rate differentials, and depreciated rupee attracted investments from migrants. Second, the employment prospects for Indian migrants in developed economies remained relatively stable during the crisis as they were engaged in professional and technical services sectors (the financial crisis mostly hit the construction and real estate sectors).

The sources of remittances received in India broadly reveal the migration pattern, skill content of the migrants and the earning levels. Prior to the IT & BPO revolution of 1999, the larger share of India’s remittance earnings was from unskilled and semi-skilled workers in Gulf countries (UAE, Saudi Arabia, Oman, Qatar) as most of them had temporary employment and  remitted their earnings home while migrants to the US, Canada and the UK had secure jobs and came from families that needed less support. From 1997 onwards, IT and software related short-term work assignments attracted Indians across the globe contributing to an increase in the remittances from North America (the US, Canada).

Even though number of migrant workers to Gulf countries is much larger than that to North American countries, the two groups contribute nearly equal amounts to the total remittances, as migrants to the North America countries have relatively higher average earning levels. These two regions account for about 70% of India’s remittance flows. As per a survey conducted by RBI, there was a significant increase in private transfers from the Gulf, North America, East Asia, while the proportion of private transfer receipts from Europe, Africa and South America moderated during FY13. The World Bank reports that the UAE, the US and Saudi Arabia are the top three countries sending remittances to India.

From the above discussion, it is observed that: First, remittances which constitute around 3-4% of India’s GDP, have remained an important source of external earnings since the last three decades and provided considerable support in narrowing the current account deficit. Second, these flows have not only been a dominant component of India’s invisible receipts, but also been stable in their trend over the years. The well diversified sources of remittances had lent a high degree of resilience to the flows even during the global financial crisis. Third, unlike capital flows that follow the economic cycle, remittances tend to be less volatile and counter-cyclical relative to the recipient countries’ economic cycles.

Also, remittances to India tend to be higher when economic conditions in the host countries are favourable. High remittance cost and the G20
The major barrier to these remittance flows is the exorbitant cost of sending money home. According to the World Bank, with almost $11 billion in remittances flowing from the US to  India in 2012, lowering the cost of  making remittances along this corridor from 4.8% (the average cost) to below 2% (the cost in the Singapore-Bangladesh corridor) would translate into an additional $333 million reaching beneficiaries in India.

Remittances started to receive increasing attention since the G8 Sea Island Summit in 2004. In 2009, the member countries committed to reduce remittance cost from 10% to 5% in five years, known as the 5×5 Objective. Following that, the Global Remittances Working Group (GRWG) was created in World Bank in February 2009 as a platform to provide guidance and policy options. The G20 officially endorsed the GRWG in 2010 Summit in Seoul and formally included the 5×5 Objective in the Cannes Summit in 2011.

Since the endorsement of the G20 in 2010, the global average cost of sending remittances has come down from 9.67% in Q12009 to 8.36% in Q12014 with a saving of nearly $30 billion. There had been some success stories and innovations like M-Pesa in Kenya which enables people to remit money at a fixed cost of only 60 cents per transaction. The US Fed started a programme with Mexico to enable money service businesses to send money to Mexico for a fixed cost of only 67 cents per transaction.

The World Bank’s ‘Migration and Development Brief’ in April 2014 states that ‘the total average cost of making remittances in South Asian region fell to 6.6% in the first quarter of 2014, from 7.2% a year earlier. Larger corridors, like the Saudi Arabia to India, UAE to India, and the US to Pakistan, attract more remittance service providers and are typically more competitive, leading to some of the lowest remittance costs in the world.’ The cost is reduced due to the adoption of improved technology, such as cell-phone services to enable remittances and targeted government policies for remittances, like the Pakistan Remittance Initiative.

Continued attention from G20 member countries is needed for further improvement in remittance flows. It is important to put in place the infrastructure needed for encouraging remittances by including all the post offices in the electronic clearing and settlement systems. Reducing migration costs, recruitment costs for low-skilled temporary workers, visa-passport cost, and flow of remittances into bank account to facilitate loan and insurance products for recipients will help attract flows.

As most of the remittance money flows to rural areas, banking penetration in India needs to be improved as 61% of rural population in India in unbanked. The new Pradhan Mantri Jan Dhan Yojana is a step in the right direction. Providing financial literacy and mandatory opening of a bank account by the migrant worker before leaving would increase the ease of remitting money home. RBI recommends web-based online remittances, use of micro-finance institutions and NBFCs which will strengthen the formal channels but also lead to greater financial inclusion.

A new system may be introduced to credit the beneficiaries’ account directly from the remitters’ accounts with foreign banks abroad.

In several sending countries around the world, banks often refuse to provide banking services to non-bank remittance service providers (RSPs), thereby preventing them from accessing the payment systems infrastructure. As the UAE, Saudi Arabia and the US account for most of our remittances from abroad and are part of the G20, India can take up the issue at the summit. The government should promote competition and encourage partnership with RSPs instead of exclusive partnerships post office or national banking system and the money transfer company.

This will help bring down the cost of remittances considerably to around 1% in next three years.

By Rajiv Kumar and Geetima Das Krishna

Kumar is Senior Fellow and Das Krishna is Senior Researcher, Centre for Policy Research

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