From UPSC perspective, the following things are important :
Prelims level : Remittances
Mains level : Remittances inflows and their significance
India is expected to receive a record $100 billion in remittance in 2022, the top recipient this year, the World Bank has said.
What are Remittances?
- A remittance is a non-commercial transfer of money by a foreign worker, a member of a diaspora community, or a citizen with familial ties abroad, for household income in their home country or homeland.
- The World Bank defines it as “the sum of worker’s remittances, compensation of employees, and migrants’ transfers as recorded in the IMF Balance of Payments.
- Workers remittances are current transfers by migrant who are considered residents in the source.
- Remittances are a vital source of household income for low- and middle-income countries.
India’s total remittances to grow
- Remittances to India are money transfers from non-resident Indians (NRIs) employed outside the country to family, friends or relatives residing in India.
- In its Migration and Development Brief, the World Bank has said India’s remittance will grow 12 per cent from 7.5 per cent last year, resulting in $100 billion flow as compared to $89.4 billion in 2021.
- It attributed the feat to the large share of Indian migrants earning relatively high salaries in the US, UK and East Asia.
Key points from the report by World Bank
- Highly-skilled Indian migrants living in wealthy nations such as the US, UK, and Singapore were sending more money home.
- Remittances to low and middle-income countries have grown by 5% in 2022 to around $626 billion – around half the rate of growth seen in 2021.
- The amount of money sent back home by migrants around the world has grown by 5% in 2022.
- Other top recipient countries for remittances include Mexico, China, Egypt and the Philippines.
- Domestic and International shocks have affected countries like Pakistan, Bangladesh, and Sri Lanka for whom remittances earned by migrants are expected to drop this year
- Barring India and Nepal, other south Asian countries saw a decline of more than 10% in their remittances from 2021, due to the end of government incentives introduced during the pandemic
Why is remittance to India so high this year?
- Upskilling: There has been a gradual shift in destinations for Indian migrants aided by a structural shift in qualifications.
- Work from home: Indian migrants in high-income countries benefited from work-from-home and large fiscal stimulus packages.
- Easing of pandemic: As the pandemic eased, the wage hikes and “record-high employment conditions” helped migrants send money home despite high global inflation.
- Inflation control in India: The price support policies kept inflation at bay in India.
- Crude oil dynamics: Demand for labour increased with higher oil prices, which in turn increased remittances for Indian labourers.
Significance of remittances
- Stable source of funds: Remittance flows tend to remain relatively stable through the business cycle, thereby having the potential to support households in the face of economic adversity.
- Economic lifeline: In countries affected by political conflict, they are often an economic lifeline to the poor.
- Labour contribution: While migrant remittances contribute to the development of their home country, and also to the host country by filling the gap between labour demand and supply and making a positive net fiscal contribution.
- Globalization: In this way, remittances represent globalization with a human face, contributing to the spread of global interdependence at all levels – social, economic and political.
Issues with Remittances
- Fear of currency depreciation: It causes the rupee to weaken against the dollar, which in return impacts the businesses exposed to foreign exchange, and the economy overall.
- Accuracy of data: A key challenge for policymakers, researchers and investors interested in remittance flows concerns the accuracy and consistency of available data.
- Accounting inconsistencies: The varied nature of remittance transactions makes the compilation process complex, resulting in a systemic problem of under-reporting of flows and data asymmetries between host and recipient countries.
- No formal registration in India: The main source of data on remittances is the World Bank, which combines national balance of payments data compiled by the IMF with country information.
- Ignoring informal flows: A large share of remittances is believed to flow through informal channels, which are often more convenient and cheaper than formal ones.
- Hawala transactions: In addition, Hawala (an international network of money brokers) and Hundi (a form of credit instrument) systems operate in parallel to formal remittance channels.
- Promoting labour mobility: India should aim to increase remittances to say 10% of GDP. The Philippines’ model of promoting labour mobility should be replicated in India.
- Reducing the costs involved: Both the cost of recruitment of such workers and the cost of sending remittances back to India should come down.
Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes
(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more