India has emerged as the top recipient of remittances globally, with the World Bank projecting that the country’s remittance flows will reach $100 billion in 2022.
The changing profile of Non-Resident Indians (NRIs) and a structural shift in their destinations have been the key drivers behind this rise in remittances. As the Indian diaspora, especially those in developed countries, continue to earn more, remittances are set to grow further.
However, the cost and speed of international money transfer remain a significant barrier to increasing remittance inflows. To address this, India is leveraging modern fintech tools, such as the UPI linkages, to attract more NRI money.
In this article, we will explore the changing dynamics of remittances to India and how modern fintech tools can help India tap into the potential of NRI money.
NRIs, or Non-Resident Indians, are a key aspect of India’s soft power and contribute to India’s global image, as well as its diplomatic strength.
Additionally, they possess a form of hard power – financial power. Through their inward remittances, which are the funds they send back to their families and relatives in India, they play a significant role in bolstering India’s economy, increasing its foreign exchange reserves, and ensuring macroeconomic stability.
These remittances also stimulate consumption and investment in India. According to RBI Governor Shaktikanta Das, India received a record high of $107.5 billion in inward gross remittances during the calendar year of 2022, surpassing the World Bank’s projection by $7.5 billion.
One of the contributing factors to India’s forex reserves increasing to $600 billion, which has happened again after nearly a year, is the stabilisation of exchange rates and the record inflow of remittances, among other factors.
Forex reserves had previously crossed the $600-billion threshold for the first time in June 2021, peaking at $642 billion in September 2021 before falling below that level in May 2022 due to the rupee weakening following the Ukraine conflict.
Forex reserves are used to finance imports, particularly essential commodities such as oil, to help the government pay off its external debts, and to bolster the strength of India’s currency.
The Role of Remittances in Bolstering India’s External Sector
Remittances play a significant role in India’s external sector, accounting for nearly 3% of the country’s GDP. They act as a cushion during times of economic stress, especially when India’s trade deficit widens.
Remittances are the second-largest source of external financing after service exports, and they have become even more crucial with the recent global economic downturns.
In addition to stabilizing India’s external trade position, remittances have also helped to narrow the country’s current account deficit.
The deficit decreased from 3.7% in Q2 to 2.2% in Q4 due to a lower merchandise trade deficit and robust growth in services exports, as reported by RBI Governor Shaktikanta Das. The significant increase in remittances has also boosted India’s forex reserves, which have risen from $524.5 billion on October 21, 2022, to over $600 billion.
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Apart from acting as a macroeconomic cushion, remittances also protect the Indian rupee from excessive volatility by feeding India’s forex reserves.
They are one of the stable anchors for India’s current account and have played a vital role in ensuring India’s macroeconomic stability. Therefore, the role of remittances cannot be overstated in bolstering India’s external sector.
Factors Contributing to the Surge in Remittance Flows
India has emerged as the top recipient of remittances globally, with $89.4 billion in remittances received in 2021, according to a World Bank report.
The report further states that India’s remittance flows are expected to soar to $100 billion in 2022, growing at a rate of 12 percent compared to 7.5 percent in 2021. This article highlights the factors contributing to the recent rise in remittance flows in India.
One of the key reasons for the surge in remittances is the changing profile of non-resident Indians (NRIs).
Indian migrants are shifting from low-skilled, informal employment in the Gulf Cooperation Council (GCC) countries to high-skilled jobs in high-income countries such as the United States, the United Kingdom, and East Asian countries like Singapore, Japan, Australia, and New Zealand.
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.
The proportion of remittances from the United States, the United Kingdom, and Singapore increased from 26 percent to over 36 percent between 2016–17 and 2020–21, while the share from the five Gulf Cooperation Council (GCC) countries, namely Saudi Arabia, United Arab Emirates, Kuwait, Oman, and Qatar, declined from 54 to 28 percent, as per an RBI survey.
This indicates that more remittances are being sent by wealthy NRIs than those in lower-income brackets. As NRIs, particularly those in the US, continue to climb the social ladder, they are sending more money back home.
The World Bank report states that approximately 57 percent of the approximately 5 million Indians in the US in 2019 had lived there for over 10 years, and during this time, many obtained graduate degrees that allowed them to quickly move up into the highest-income bracket.
Skilled Indian diaspora in the US and its impact on remittance flows
The Indian diaspora residing in the US is highly educated, with a significant proportion holding graduate degrees. This is in contrast to US-born residents, with only 13% holding a graduate degree.
This demographic is also proficient in English, with 77% of foreign-born Indians and 82% of all Indians in the US demonstrating proficiency in the language.
As education levels directly translate to high-income levels, with direct implications for remittance flows, the increase in the number of highly-skilled Indian migrants is accelerating the growth of remittances tied to high-salaried jobs, especially in services.
In 2019, the median household income for Indians in the US was almost $120,000, compared to approximately $70,000 for all Americans.
Furthermore, the trend of high social mobility among NRIs in the US is set to continue, with more Indian students choosing to study in developed countries. As NRIs earn more, especially in developed countries, remittances are expected to grow further.”
India’s efforts to attract more NRI money through modern fintech tools
India is looking to leverage modern fintech tools to attract more NRI money, and is focusing on tools such as UPI linkages that are faster and cheaper than traditional money transfer systems like SWIFT.
The recent UPI linkage with Singapore’s PayNow is a step in this direction. This linkage is expected to reduce the cost of international money transfer from nearly 5% to less than half, and boost India’s inward remittances.
India hopes that this cheaper and faster way of transferring money from abroad to India will be replicated with other countries, following the success of the Singapore model.
In conclusion, the rise in remittances to India is a reflection of the changing profile of the NRIs and a structural shift in destinations.
The Indian diaspora in the US is highly skilled, with many earning graduate degrees that groomed them to move rapidly into the highest-income-earner category, which has direct implications for remittance flows.
As NRIs earn more, especially in the developed countries, remittances are set to grow too. India’s modern fintech tools such as the UPI linkages have the potential to attract more NRI money with faster and cheaper cross-border fund transfers through mobile apps.
The recent UPI linkage with Singapore’s PayNow is a step in that direction, expected to boost India’s inward remittances. Overall, the future looks bright for India’s remittance industry as long as the government and businesses continue to focus on providing modern financial services and support to the growing Indian diaspora.
Samridhi holds a Bachelor’s degree in Economics. Her research interests lie in examining the intersection of the social sector with poverty and inequality,
Along with this she is keen in understanding the systemic and structural issues that governs growth and development with an interdisciplinary focus.