Remittance Inflow: How is India faring?

According to the World Bank’s latest Migration and Development Brief, the growth in remittance inflows to India will likely halve in 2024 compared to 2023. Read here to learn about remittances.

India received USD 120 billion in remittances in 2023 with growth at 7.5%.

It is forecasted to grow at 3.7% in 2024 to reach USD 124 billion, while the growth estimate for 2025 is 4% and it is expected to reach USD 129 billion by 2025.

Remittances Inflow

Remittances refer to the money sent by migrants working abroad to their home country.

The recipients typically use these transfers for household expenses, education, healthcare, and sometimes small-scale investments.

Remittances form a crucial part of the economy for many developing countries, contributing significantly to their GDP.

Sources:

• Migrant Workers: The primary source of remittances is migrant workers who send money back to their families.
• Diaspora Communities: Members of diaspora communities often send remittances to support relatives and community projects in their home countries.

Channels:

• Formal Channels: Banks, money transfer operators (such as Western Union, and MoneyGram), and mobile money services.
• Informal Channels: Hand-carry, hawala systems, and other informal networks.

Types:

• Personal Remittances: Funds sent by individuals to their families or friends.
• Collective Remittances: Contributions from diaspora communities for community development projects.

Importance of Remittances

• Economic Stability:
  • Foreign Exchange: Remittances provide a stable source of foreign exchange for recipient countries.
  • Balance of Payments: They help in balancing the current account and reducing the trade deficit.
• Poverty Alleviation:
  • Household Income: Remittances improve the living standards of recipient households by increasing their disposable income.
  • Social Services: Families use remittances for education, healthcare, and housing, contributing to better social outcomes.
• Economic Development:
  • Investment: Some remittance funds are used for small-scale investments, such as starting businesses or improving agricultural practices.
  • Consumption: Increased household spending boosts local economies through higher demand for goods and services.
• Social Impact:
  • Education: Funding education expenses, leads to higher literacy rates and better job opportunities.
  • Healthcare: Improving access to healthcare services, leading to better health outcomes.

Global Trends in Remittances

• Leading Recipient Countries:
  • India, China, Mexico, the Philippines, and Egypt are among the top recipients of remittances.
  • India has been the largest recipient of remittances for several years.
• Major Source Countries:
  • The United States, Saudi Arabia, the United Arab Emirates, and other high-income countries with significant migrant populations are major sources of remittances.
• Impact of COVID-19:
  • The COVID-19 pandemic caused a temporary decline in global remittances due to economic slowdowns and job losses among migrants. However, remittances rebounded as economies recovered.

Challenges in Remittance inflows

• High Transaction Costs: The cost of sending remittances can be high, especially through formal channels. Efforts are being made to reduce these costs.
• Regulatory Barriers: Different countries have varying regulations, which can complicate the remittance process and increase costs.
• Informal Channels: A significant portion of remittances is still sent through informal channels, which can be unreliable and lack transparency.
• Economic Dependence: Over-reliance on remittances can make recipient countries vulnerable to economic changes in the source countries.

In the news

The World Bank’s latest Migration and Development Brief highlights that global remittance flows to low- and middle-income countries (LMICs) have shown resilience despite various economic challenges.

• In 2023, remittances to LMICs grew by 0.7%, reaching an estimated $656 billion.
• This growth, though modest, underscores the importance of remittances as a crucial source of external finance for developing countries, surpassing both foreign direct investment (FDI) and official development assistance (ODA).
• The top recipient countries of remittances in 2023 include India ($125 billion), Mexico ($67 billion), China ($50 billion), the Philippines ($40 billion), and Egypt ($24 billion).
• These funds play a significant role in supporting the economies of these countries, particularly in times of financial instability and inflationary pressures.
• Remittances to regions like South Asia grew by 7.2%, while other regions saw varying growth rates.
• However, regions such as the Middle East and North Africa experienced declines in remittance inflows due to economic and political factors.

Looking forward, the growth of remittances to LMICs is expected to continue, albeit at a slower pace, with a projected increase of 3.1% in 2024.

This projection considers the ongoing global economic slowdown and potential declines in real incomes for migrants due to inflation and other economic challenges.

Factors Affecting Remittance inflows to India

Strong Economic Conditions

• Developed Economies: High-skilled Indian migrants in the US, UK, and Singapore benefit from strong labour markets and lower inflation. This results in higher disposable incomes and, consequently, increased remittances.
• Employment Growth in Europe: Post-pandemic recovery in Europe, with high employment growth and reduced inflation, has contributed to increased remittance flows globally.

Diversified Migrant Pool

• GCC Countries: A significant portion of India’s migrant population resides in the GCC, providing a buffer against economic downturns in any single region. The UAE accounts for 18% of India’s remittance flows, while Saudi Arabia, Kuwait, Oman, and Qatar collectively account for 11%.
• Economic Conditions in GCC: High energy prices and controlled food price inflation in the GCC have positively impacted employment and incomes for Indian migrants, especially in less-skilled sectors.

Improved Remittance Channels

• Unified Payment Interface (UPI): Initiatives like UPI enable real-time fund transfers, making remittances faster and more efficient. The National Payments Corporation of India (NPCI) has extended UPI usage to NRIs in several countries, including the US, UK, Singapore, Australia, Canada, and GCC countries.

Top Sources of Remittances for India

• High-Income Countries: Approximately 36% of remittance flows come from high-skilled migrants in the US, UK, and Singapore. Tight labour markets and wage hikes in these countries have boosted remittances.
• GCC Countries: The UAE alone accounts for 18% of India’s remittance flows, with other GCC countries collectively contributing 11%.

How to Increase Remittance Inflow in India?

• Boosting Financial Inclusion: With only 80% of Indians having bank accounts, expanding formal financial services, particularly in rural areas, can facilitate easier remittance transfers. This includes increasing the network of bank branches, ATMs, and digital platforms.
• Reducing Remittance Costs: Encouraging competition among remittance service providers and promoting digital channels can lower transaction costs. Government incentives for using formal channels can further boost remittance inflows.
• Enhancing Remittance Infrastructure: Upgrading payment systems and leveraging technologies like blockchain can streamline the remittance process. The Reserve Bank of India’s centralized payment systems, such as RTGS and NEFT, are steps toward this goal.
• Targeted Diaspora Engagement: Initiatives like Pravasi Bharatiya Divas and the Know India Programme can strengthen connections with the Indian diaspora. Offering attractive investment options and tax breaks, as suggested by the IMF, can incentivize higher remittance inflows.
• Promoting Economic Stability: Implementing sound macroeconomic policies, improving the ease of doing business, and addressing corruption can enhance diaspora confidence, creating a more attractive environment for remittance flows.

By addressing these areas, India can further enhance its remittance inflows, contributing significantly to its economic growth and development.

Conclusion

Remittance inflows play a vital role in the economies of many developing countries, providing crucial support to millions of households.

By improving financial access, reducing transaction costs, and supporting migrants, countries can maximize the benefits of remittances, fostering economic growth and improving social outcomes.

Read: Cross-border remittances

-Article by Swathi Satish