Importance of Remittances

Remittances contribute to the financial and social inclusion of needy people worldwide and to the economic growth of a country. They also play an important role during financial crises. The recent World Bank report on remittances is a testimony to the fact that remittances flows have remained more resilient as compared to private debt and equity flows and foreign direct investment.

Remittances are stable and may even tend to be counter-cyclical in times of economic hardship. Remittances are now more than double the size of net official flows and are second only to foreign direct investment as a source of external finance for developing countries. In 36 out of 153 developing countries, remittances are larger than all capital flows, public and private.

Remittances could also help in reducing poverty, as it could be the poor who migrate and send money to their families. Some may argue that it is actually the rich who can migrate and send back remittances. Remittances could also be used to promote literacy. Studies show that the school dropout rate is lower and enrollment rate is higher in households that receive remittances.

There is tremendous potential for using remittances to encourage development in countries. Remittances could increase when the home country’s economy is going through a patchy phase. During such times, an individual might prefer to remit more to aid his family’s consumption back home. The money sent home could also be used to promote economic growth, increased investment and community development.

Factors driving remittances into India

In our last article (Migration and Remittances: An ecosystem that co-exist), we explored the understanding between two factors, migration and remittance. In this article, we take a look at the factors that could play a major role in influencing remittances into India.

In recent times, an increase in remittances to India can primarily be attributed to many reasons. According to policy experts, factors responsible for the growth in remittances include the role of various channels to remit wealth, shifting emigration pattern to highly skilled intensive operations, greater competition in the money transfer market and the extent of economic activity in the source country. The most significant factor in the surge of remittances, ultimately, may be the way NRIs perceive the Indian economy. Though the liberalization of the Indian economy in 1991 was a clear benchmark, its real significance has taken time to crystallize. Indian economy has been witnessing an incremental growth since the last decade. Commensurate with the increase in the number of migrants from India, remittances have been growing since the past decade. * Perhaps the most crucial factor in the remittance market is a sound macro economy and a good investment environment. Migrants will remit more and might also prefer to invest remittances in activities with a substantial multiplier effect.

Thus, a positive investment climate could also be one of the key factors for driving remittances into India. With increasing incentives and tax exemptions coupled with liberalized foreign exchange controls, remittances might just continue to grow.

* Migration and Remittances Factbook 2011

 

How significant are Remittances?

Table #1

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Table # 2

The above table # 1 clearly indicates that remittances are again on the rise after a decline during the year 2008-2009. The World Bank report titled ‘Migration and Remittances Factbook 2011‘ states that worldwide inflows are expected to reach $440 billion by 2010. Remittances to developing nationsare likely to reach a record figure of $325 billion from the 2009 figure of $307 billion. India ($55.0 bn) has also been ranked as the no.1 remittance recipient in 2010 followed by China ($51.0 bn), Mexico and other countries.

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Also, remittances have been resilient as compared with other resource flows (as per the table above) especially during the global financial crisis. Despite a decline in remittance inflows to developing countries in 2008-2009, these flows have remained more resilient compared with private debt and equity flows and foreign direct investment. The reasons could be as follows: –

1. Remittances are sent by the cumulated flows of migrants over the     years, not only by the new migrants of the past year or two. This makes remittances persistent over time. If new migration stops, then over a period of a decade or so, remittances may stop growing. But they will continue to increase as long as migration flows continue.

2. Remittances are a small part of migrants’ incomes and migrants continue to send remittances even when affected by income shocks.

3. Because of a rise in anti-immigration sentiments and tighter border controls in the United States and Europe, the duration of migration appears to have increased. Those migrants staying back are likely to continue to send remittances.

It is generally assumed that in a large economy like India’s, the impact of remittances is negligible. But, compared with some important factors of the economy, their relative importance is significant. How big is $ 55.0 billion as remittance revenue? It is almost one and half times of India’s defense budget and also bigger than India’s total IT exports. Remittances result in more capital inflows into the country, which in turn could lead to more investments in health, education and small business.

With better tracking of migration and remittance trends, policy makers can make informed decisions to leverage this massive capital inflow for the benefit and development of the country.

 

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