>Remittances, Equity and Indian Economy

       According to World Bank, more than 215 million people live outside their home countries by birth and over 700 million migrate within their countries. This means that around 1/10th of the global population migrate within their countries. These migrants repatriate portion of their savings back to their home countries. Over the years, these remittances have proven to be highly beneficial to many countries across the world and accounted for 2% of the GDP (2008) of all developing countries. The World Bank compiles and publishes the country-wise remittances data on a periodic basis. A quick analysis of this data suggests that global remittances have grown by approximately 12x from US$37bn in 1980 to US$449bn in 2010. During 2011, the remittances are expected to grow by 7.5% to reach US$483bn. Being a source of external finance, for developing countries, the contribution of remittances position just next foreign direct investment (FDI). During 2010, the remittances to the developing countries stood at US$325bn i.e. 72% of the total global remittances. One of the key reasons of this remarkable rise in the remittances is persistent inequality of income between nations, undervalued exchange rates and also differential tax rates.


When compared to the capital flows (FDI, portfolio investments by FII’s etc.), remittances are more stable source of external finance and directly benefit the receiving country. In the wake of the Asian financial crisis during 1997, remittances to developing countries continued to rise even though FDI declined. Moreover, these transfers are majorly utilized towards three key areas – health, education and real estate while some portion also goes towards other investments. This means that it serves for the social growth of the nation leading it towards long term economic growth. In addition to this, remittances can also play a key role in poverty improvement and boosting domestic consumption.


According to a study done by Ralph Chami, Dalia Hakura and Peter Montiel, remittance flows have contributed on average to reducing output growth volatility in remittance-receiving countries, and thereby represent an important channel through which they may affect growth and welfare in these countries. Logically speaking, the affect of remittances on growth should be more if the country’s dependence on remittances is high. To understand the economic impact, a ratio of remittances to GDP (R/G) is a good measure.


According to an IMF working paper: Do Worker’s Remittances promote economic growth? (by Adolfo Barajas, Ralph Chami, Connel Fullenkamp, Michael Gapen and Peter Montiel in July 2009), remittances have contributed little to economic growth in remittance-receiving economies and may have even retarded growth in some. So, it remains an open debate about the most relevant impact of the remittances on the growth of the receiving country.


India is the world’s top receiver of remittances and accounted for approximately 12% of the total global remittances in 2010. Over the last 3 decades, the remittances to India have grown 19.6x from US$2.8bn in 1980 to US$54bn in 2010. For India, R/G ratio has grown from 1.5% in 1980 to 3.3% in 2010. Compared to the average GDP growth of 6.1% per year over the last 30 years, remittances have grown at an average 14.6% per year.


In India, Reserve Bank of India (RBI) calculates the total outstanding NRI deposits as a sum of Foreign Currency Non-Resident (Accounts), Foreign Currency Non-Resident (Banks), Non- Resident (External) Rupee Accounts, Non-Resident(Non-Repatriable) Rupee Deposits and Non-Resident Ordinary Rupee Account. As of Mar’11, the total outstanding NRI deposits stood at US$51.7bn and grew by an average rate of 7.3% since 1995.


To read the full report: Remittances, Equity and Indian Economy
RISH TRADER