Foreign Remittances to India

JUL 31

Mains   > Economic Development   >   Indian Economy and issues   >   External sector

IN NEWS:

  • India received 87 billion dollars in remittances in 2021, the top remittance recipient, and way ahead of countries like China and Mexico, according to a World Health Organisation report.

REMITTANCE:

  • Remittances, or “cross-border person-to-person payments of relatively small value,” serve as an important lifeline for the developing world.
  • The legal framework for administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999 (FEMA).
  • Under the FEMA, all transactions involving foreign exchange have been classified either as capital or current account transactions.
  • All transactions undertaken by a resident that do not alter his/her assets or liabilities, including contingent liabilities, outside India are current account transactions.

TRENDS IN REMITTANCE TO INDIA:

  • In 2021, the top five remittance recipients were India, China, Mexico, the Philippines and Egypt.
  • The United States was the largest source country for remittances, followed by the United Arab Emirates, Saudi Arabia and Switzerland.
  • The share of remittances from the Gulf Cooperation Council (GCC) in India’s inward remittances is estimated to have declined from more than 50% in 2016- 17 to about 30 per cent in 2020- 21.
  • The share of Kerala, Tamil Nadu and Karnataka, which had strong dominance in the GCC region, and were big remittance contributors, has almost halved in 2020-21. They now account for just 25% of total remittances since 2016-17, while Maharashtra has emerged as the top recipient state surpassing Kerala.

SIGNIFICANCE OF REMITTANCE:

  • Support households:
    • Remittances are an important source of family income and helps meet basic household needs besides education and entrepreneurship.
    • A 2018 RBI study reports that almost three-fifths of remittances received by households were for family maintenance purposes.
  • Promotes economic growth:
    • Remittances are one of the largest sources of external financing in India. Remittances increase people’s purchasing power which drives the consumption market and drives demand and supply.
  • Augment forex reserves:
    • Remittances to India are also one of the important contributors to foreign exchange reserves and account for over 20 per cent of the total foreign exchange reserves in the country.
  • Cushion against economic shocks:
    • Remittance flows tend to be more stable than capital flows, and they tend to be countercyclical—increasing during economic downturns or after a natural disaster when private capital flows tend to decrease.
  • Attain SDGs:
    • Remittances can contribute to reaching the Sustainable Development Goals (SDGs) in a variety of ways:
      • At household level: by recognizing the positive socioeconomic impact of remittances on families and communities (SDGs 1-6)
      • At community level: promote synergies between remittances and financial inclusion, encourage market competition and regulatory reform, and mitigate any negative impact resulting from climate change (SDGs 7, 8, 10, 12 and 13).
      • At national level: by ensuring that the revitalized Global Partnership for Sustainable Development – as outlined in SDG 17 – and the Global Compact on Migration promote collaboration across all sectors involved in remittances.

CONCERNS:

  • High cost of transaction:
    • Intermediaries charge a significant amount for international money transfers, typically an average 7 percent, and can be as high as 15–20 percent.

                                            

 

  • “Brain drain”:
    • Recent trends in migration from India shows increasing migration of high-skilled white-collar workers towards the US, the UK and Canada. While this augurs well for total remittance inflows, it can create shortage of quality labour in India.
  • Challenge in balancing exchange rates:
    • If remittances are large, the recipient country could face real exchange rate appreciation that may make its economy less competitive internationally.
  • Restrictive immigration policies:
    • Many countries, especially those in the middle east, are increasingly adopting measures for nationalisation of labour force. Eg: Saudi Arabia's Nitaqat program.
  • Declining demand for labour:
    • Beside nationalisation efforts, demand for labour is likely to be rationalised in host economies through the implementation of automation capabilities across the value-chain.

WAY FORWARD:

  • The destination countries will require more skilled workers and demand for low-skilled foreign workers will come down in the future. India should invest in training its workforce for more skilled jobs in the destination countries.
  • Remittance service providers need to adapt to the changing times by investing heavily in digital technologies.
  • Remittances have been the largest source of external finance for India, and have served important developmental goals, yet, has occupied less mind space of policymakers. It is about time we reassess our policy priorities in this regard.

El Salvador and Crypto currency:

El Salvador became the first nation in the world to adopt Bitcoin (BTC) as legal tender in September 2021, hoping that this might reduce the USD 200M or more lost in remittance fees every year. Nearly 20% of El Salvador’s GDP consists of remittances sent from countries like the United States.

PRACTICE QUESTION:

Q. Discuss the significance of external remittances in Indian economy?