Floating of diaspora bonds, mobilising savings through diaspora philanthropy, tapping into wealth from diaspora communities to support balance of payments needs...
India has experienced various phases of migration—the most recent during the 1990s when a large number of Indians moved to the US and the UK because of the IT boom. Migration has grown from 8 million in 2000 to over 14 million in 2013, according to UN estimates. While a significant portion of migration is directly associated to employment, 80% of the students who shift to another country for higher education consider settling down there, resulting in disguised migration.
Over the last four decades, India has witnessed a major migration trend. This is mainly due to a large population as compared to fewer number of employment opportunities in India. In most cases, a man (generally a brother or the eldest son) travels abroad for better income prospects and remits money to India. This is where international remittance comes into the picture.
The latest World Bank Migration and Development brief pointed out that India has surpassed China, receiving $71 billion in remittances in 2014. India has retained the top spot amongst remittance-recipient countries since 2008—thanks to a large diaspora. So far, remittance reserves from around the world have touched $340 billion.
Remittances have contributed in controlling India’s CAD over the last decade. The $71 billion private transfers contributed to 3.4% of GDP in 2014. Floating of diaspora bonds, mobilising savings through diaspora philanthropy, tapping into wealth from diaspora communities to support balance of payments needs, among other steps, can make the India growth story inclusive over the long-term.
Economic impact of remittances
Remittances make a valuable contribution to the lives of consumers as well. According to a recent economic impact study conducted by Western Union and Nielsen to understand the money transfer practices of consumers as well as the impact of remittance on their lives, remittances have helped Indian families vastly improve their standard of living, financial independence and the standards of education and skills for their children, ensuring long-term benefit. Overall, 77% respondents agreed that remittances reduced their economic problems. About 63% agreed that remittances led to better schooling and higher education. And 50% agreed that it helped increase savings and investments. These increased savings are mostly in terms of money deposited in bank accounts (80%) followed by buying insurance (50%).
The study found remittances are used to raise immediate standards of living and access healthcare. Additionally, a significant portion is used to fund education, developing skills and the long-term economic prospects of the recipient families.
Remittances and FDI
During times of a financial turmoil, companies may pull out investments, but the case of remittances is different. Remittances remain in the economy and are directly used by recipients, contributing to the growth of the nation.
In fact, private transfers have been of the same magnitude as net inflows of foreign direct and portfolio investments into the Indian economy from April 2014 to February 2015. Despite an increase in FDI by 26% in 2014, the total amount of FDI was estimated at $35 billion, while the total estimated amount of remittances that India saw flowing in was $70 billion.
Impact on balance of payments
India is the largest recipient of worker remittances in the world, but the robust remittance inflows are always taken for granted. When CAD drops due to rising imports and dividend- and interest- outflows, these private transfers are considered to be crucial for India’s balance of payments. Remittances are more than just a source of money. From a balance-of-payments perspective, remittances are permanent foreign currency inflows and help finance CAD, unlike NRI deposits that cane be repatriated.
The cost of remittances is coming down and interest rates still remain comparatively high, which may encourage larger remittances. It appears remittances are a dependable source of funding a part of CAD and therefore care needs to be taken to see that their flow is maintained.
Of late, Indians in West Asian nations were forced to return after local tensions escalated. This will have direct implications on Kerala’s labour markets. The unemployment rate will rise as migrants return. Remittances will fall, impacting the GDP of the state and India as a whole.
The question here is, how to keep the remittance inflows steady. in order to avoid imbalances in CAD and balance of payments of India. Financing this gap is a serious policy concern if FDI inflows remain sluggish.
Can settlements do what FDI is relied upon to do? In spite of the overcast standpoint over future inflows, the World Bank supposes they can be utilised for imaginative financing of improvement and foundation ventures. Envision the conceivable outcomes of the slug train framework being financed by settlements and diaspora investment funds.
The author is managing director & regional vice-president, India & South Asia, Western Union