Indian economy: How NRI money is bolstering India’s economy

Indian economy: How NRI money is bolstering India's economy


The Non-Resident Indians (NRIs) are part of India’s soft power, boosting India’s global image as well as adding to its diplomatic heft. But they hold a hard power too — the power of money. Inward remittances, or the money they send back to their families and relatives in India, bolster India’s economy by fattening its foreign exchange reserves and ensure India’s macroeconomic stability. They also fuel consumption and investment in India.

India’s inward gross remittances touched an all-time high of $107.5 billion during calendar year 2022, RBI Governor Shaktikanta Das announced yesterday. The remittances have overshot the World Bank projection by $7.5 billion.

And that, besides other factors, has helped India’s forex reserves to jump back to $600 billion now after nearly a year. Forex reserves have again crossed the $600-billion mark with the exchange rate stabilising and record remittance flows. Reserves had crossed the $600-billion mark for the first time in June 2021 and touched a high of $642 billion in September 2021 before slipping below that level in May 2022 when the rupee came under pressure following the Ukraine invasion. Forex reserves fund imports, most crucial of them being oil; help the government pay off its external debt; and strengthen India’s currency.

Remittances are a macroeconomic cushion
Remittances account for a significant chunk of nearly 3% of India’s GDP. They are a buffer to India’s external sector, which has been stressed recently due to various global economic woes. When India’s trade deficit widens, remittances provide a much-needed cushion. being the second largest source of external financing after service exports. Lately, India’s external trade position got stable with narrowing of merchandise trade deficit, higher services exports and, of course, more-than-expected remittance growth.

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Announcing the rise in reserves yesterday, Das said that the country’s current account deficit (the vale of import of goods and services exceeding the value of exports as a percentage of the GDP) has narrowed to 2.2% in Q4 from 3.7% in Q2 because of a lower merchandise trade deficit and robust growth in services exports. “Foreign exchange reserves have rebounded from $524.5 billion on October 21, 2022, and now stand in excess of $600 billion,” said Das.

Remittances are not only one of the stable anchors for India’s current account, by feeding India’s forex reserves they also help the RBI protect the rupee from excessive volatility.

Why remittances are set to grow
In 2021, India had received $89.4 billion in remittances, according to a World Bank report, which made India the top recipient globally. The World Bank had projected India’s remittance flows to soar to $100 billion in 2022, growing at 12 per cent compared to 7.5 per cent in 2021. Reasons for the recent rise in remittances are the changing profile of the NRIs and a structural shift in destinations.

With a share of 23 percent of total remittances, the United States has surpassed the United Arab Emirates as the top source country for India’s remittances in 2020–21, says the World Bank report. Remittances have benefitted from a gradual shift in Indian migrants’ job profiles — from low-skilled, informal employment in the Gulf Cooperation Council (GCC) countries to high-skilled jobs in high-income countries such as the US, the UK, and those in East Asia (Singapore, Japan, Australia, New Zealand).

Between 2016–17 and 2020–21, the share of remittances from the US, the UK, and Singapore increased from 26 percent to over 36 percent, while the share from the five GCC countries (Saudi Arabia, United Arab Emirates, Kuwait, Oman, and Qatar) dropped from 54 to 28 percent, according to an RBI survey. This shows more remittances from well-off NRIs than those at lower rungs.

The NRIs, especially in the US, are gradually clawing up the social ladder, which means they are increasingly sending more money home. According to the US Census, of the approximately 5 million Indians in the US in 2019, about 57 percent had lived there for more than 10 years. During this time, many earned graduate degrees that groomed them to move rapidly into the highest-income-earner category, says the World Bank report.

The Indian diaspora in the US is highly skilled. In 2019, 43 percent of Indian-born residents of the US had a graduate degree, compared to only 13 percent of US-born residents. Only 15 percent of Indian-born residents aged 25 and older had no more than a high school degree, compared to 39 percent of US-born residents in that age group. Meanwhile, 82 percent of all Indians in the US (compared to 72 percent of all Asians) and 77 percent of foreign-born Indians were proficient in English.

Higher education translates to high income levels, with direct implications for remittance flows. In 2019, the median household income for Indians in the US was nearly $120,000 compared to about $70,000 for all Americans. The structural shift in qualifications and destinations has accelerated growth in remittances tied to high-salaried jobs, especially in services.

A rising preference among Indian students for studying in developed countries will only add to the trend of high social mobility among NRIs in the US. As NRIs earn more, especially in the developed countries, remittances are set to grow too.

India’s grab for the NRI money
India can attract more NRI money with modern fintech tools such as the UPI linkages which prove faster and cheaper than the traditional money transfer systems such as the SWIFT.

The recent UPI linkage with Singapore’s PayNow for faster and cheaper cross-border funds transfers through mobile apps is a step in that direction. The cost of international money transfer is nearly 5% which the India-Singapore linkage can cut to less than half. This is expected to boost India’s inward remittances. A cheaper and faster way to transfer money from abroad to India will surely help. If the Singapore model works, it can be replicated with a large number of other countries.



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