Learn why remittances are a big deal for India
Indians working overseas are sending more funds home than ever before.
Remittances – transfers of money by Indians working overseas back home – are a key source of funding to maintain India’s balanced economy. As total inflows reach record highs, we take a closer look at this resilient sector.
Globally, India was the highest recipient of remittances in 2018, hitting a record USD79bn, followed by China, Mexico, Philippines and Egypt, according to World Bank data. More than half of the remittances into India originate in the Gulf countries, with UAE alone accounting for 20% share in 2018. The US is the second biggest source overall with the UK, Malaysia, Canada, Hong Kong, and Australia also featuring in the top ten.
There are currently about 30 million overseas Indians, of which 13 million are Non-Resident Indians (NRIs) and 17 million are People of Indian Origin. The highest concentration of NRIs is in the Gulf countries, with 24% in Saudi Arabia, 20% in UAE and 4-8% each in Kuwait, Oman and Qatar. While migrant numbers are high in this region, they account for a comparably smaller share in remittances as the workforce consists mainly of semi-skilled and unskilled workers, according to the International Labour Organization. Meanwhile, the US has a relatively lower proportion of NRIs but is the second biggest contributor to overall remittances, reflecting the skilled workforce’s higher earning capacity.
Who are the beneficiaries?
Two-thirds of the remittances is received by four main states – Kerala (19%), Maharashtra (17%), Karnataka (15%) and Tamil Nadu (8%), according to a Reserve Bank of India survey.
Two-thirds of the funds are used by the recipient for family household consumption and sustenance, 20% is held as deposits with banks, 8% goes into physical asset investment, while the rest is for miscellaneous purposes such as healthcare or recreation.
How are the funds remitted?
Some 70% of the fund transfers are above USD500. Migrant workers prefer to accumulate and transfer bigger amounts as overhead costs per dollar come down with larger remittances.
Clearly, transactions are sensitive to costs, incurred by the sender and the recipient. These costs are influenced by various factors, including distance between the host and recipient economy, financial infrastructure, market competition, exchange rates and the sum being transferred.
Rupee Drawing Arrangements (RDA)/vostro accounts are the most popular transaction method, mainly via private and foreign banks which offer relatively low costs. Other preferred channels are SWIFT payments, followed by direct transfers and cheques/drafts.
For non-bank/financial institutions, Money Transfer Operators (MTOs) have a clear advantage, particularly amongst migrant workers who might not be financially savvy, or for beneficiaries who might not have access to proper banking channels in their countries. As costs of routing funds through MTOs is lower than banks, it’s utilised for low value cash transactions, helped further by the growth of internet-based transfer/digital payment options.
Factors influencing remittance trends
Historically, a correlation has been seen between remittances and global growth. Anecdotal trends also point to a link between oil prices and remittances, which could be causal as well, since sizeable funds are sent from Gulf/oil-producing countries. This is also validated by the drop in migration to Gulf countries during periods of low oil prices. And more recently, the risk of restrictive migration stemming from protectionist and nationalist policies could also influence remittance flows; a case in point are stricter income and skill requirements for labour movement into the US in the past two years.
However, the effect of oil is two-pronged: while high oil prices increase the import bill, it is counterbalanced by an associated improvement in remittances. In the same vein, dependency on Gulf countries, though still sizeable, has moderated, as the share of other destination countries has risen. This is likely to cushion the blow during volatile oil price swings. Lastly, with most beneficiaries likely to put their remittance funds towards family household consumption and sustenance, these are bound to continue barring unforeseen circumstances.
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