Whenever Prime Minister Narendra Modi visits a foreign country, especially a developed one, his signature move is to galvanise the non-resident Indians (NRIs) there. Modi has turned the NRI soft power into a significant diplomatic chip for India. But now his government also eyes the hard power of the diaspora — the money they send back to their families and relatives in India.
The UPI linkage with Singapore’s PayNow for faster and cheaper cross-border fund 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.
A cheaper and faster way to transfer money from abroad to India is likely to boost remittances. If the Singapore model works, it can be replicated with a large number of other countries.
Inward remittances, or the money that the NRIs send back to India, fuel consumption and investment and bolster India’s macroeconomic stability. Yesterday’s announcement of the India-Singapore payment linkage comes at the right time — first, India’s inward remittances are set to rise on their own in the coming years; and second, India needs still more foreign money coming home now as the country’s current account deficit (roughly the difference between the value of exports and imports) has been under stress.
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 — being the second largest source of external financing after services’ exports — provide a much-needed cushion. Lately, India’s external trade position has become stable with a narrowing of merchandise trade deficit, higher services exports and, of course, more-than-expected remittance growth.
According to the Reserve Bank of India (RBI), India’s current account deficit was $36.4 billion (4.4 per cent of GDP) in the second quarter of 2022-23, up from $18.2 billion (2.2 per cent of GDP) in the first quarter. Private transfer receipts, mainly representing remittances by the NRIs, amounted to $27.4 billion, an increase of 29.7 per cent from a year ago. Remittances are one of the stable anchors for India’s current account.
In 2021, India had received $89.4 billion in remittances, according to a World Bank report, which made the country the top recipient globally. The World Bank says India’s remittance flows would soar to $100 billion in 2022, growing at 12 per cent compared with 7.5 per cent in 2021.
Why remittances are set to grow
If India’s payment linkage with Singapore is extended to other countries, it will tap a remittance economy that is growing fast. 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 per cent 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 per cent to over 36 per cent, while the share from the five GCC countries (Saudi Arabia, United Arab Emirates, Kuwait, Oman and Qatar) dropped from 54 to 28 per cent, 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 climbing the social ladder, which means they are likely to send more money home. According to the US Census, of the approximately 5 million Indians in the US in 2019, about 57 per cent 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 per cent of Indian-born residents of the US had a graduate degree, compared with only 13 per cent of US-born residents. Only 15 per cent of Indian-born residents aged 25 and older had no more than a high school degree, compared with 39 per cent of US-born residents in that age group. Meanwhile, 82 per cent of all Indians in the US (against 72 per cent of all Asians) and 77 per cent 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 against 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. That’s an opportunity India can tap with modern fintech tools such as the UPI linkage, which prove faster and cheaper money transfer systems than the traditional ones such as SWIFT.