Prime Minister Narendra Modi’s signature move whenever he visits a foreign country, especially a developed one, is to galvanise non-resident Indians (NRIs). The soft power of NRIs has been turned into an important diplomatic chip by Modi, but his government is now also looking at their hard power — the money they send home to their families and relatives. Through UPI link-up with PayNow, cross-border fund transfers will be faster and cheaper through mobile apps. The cost of international money transfers has been nearly 5%, which can be cut to less than half with the India-Singapore link.
The Singapore model can be replicated with many other countries if it proves successful in boosting remittances.
Inward remittances, or the money that NRIs send back to India, fuel consumption and investment and help maintain India’s macroeconomic stability. India-Singapore UPI payment linkage was announced yesterday at the right time — India’s inward remittances are expected to increase on their own in the coming years; and second, India still requires more foreign funds to come home due to its current account deficit.
A macroeconomic cushion is provided by remittances
Remittances play a sizeable role in India’s GDP, amounting to nearly 3%. They have become a major contributor to the country’s external sector, which has faced difficulties due to economic issues taking place on a global scale. In times when India’s trade deficit increases, remittances are luckily the second biggest provider of foreign financing after services exports and can help in providing buffer. The good news is that lately India has seen greater stability in its external affairs with a diminished merchandise trade deficit, improved services exports and — above expectations — an expansion in remittance growth.
India’s current account deficit increased from $18.2 billion (2.2 percent of GDP) in the first quarter to $36.4 billion (4.4 percent of GDP) in the second quarter. A steady anchor for the Indian current account is remittances, which accounted for 29.7 percent of private transfer receipts, mainly remittances by NRIs. Remittances were $27.4 billion, an increase of 29.7 percent from a year ago.
The World Bank reported that India received $89.4 billion in remittances in 2021, making it the world’s largest recipient. The World Bank estimates that India’s remittance flows will soar to $100 billion in 2022, growing at 12 per cent compared to 7.5 per cent in 2021.
The growth of remittances
The recent rise in remittances can be attributed to a shift in destination and the changing profile of NRIs. If India’s UPI payment linkage with Singapore is extended to other countries, it can tap into a remittance economy that is growing rapidly.
The World Bank report states that the United States has now become the leading source country for India’s remittances in 2020–21, with a share of 23 per cent. This can be attributed to a gradual move in employment trends of Indian migrants, who have shifted away from low-skilled, informal work in the GCC countries towards higher-skilled employment opportunities available in affluent nations like the US, UK and also East Asian countries such as Singapore, Japan, Australia and New Zealand.
Based on an RBI survey, remittances from the US, the UK, and Singapore increased from 26 to 36 percent between 2016–17 and 2020–21, while those from the five GCC countries (Saudi Arabia, United Arab Emirates, Kuwait, Oman, and Qatar) decreased from 54 to 28 percent. NRIs with higher incomes send more remittances than those with lower incomes.
The NRIs, especially in the US, are gradually climbing the social ladder, which means they are likely to send more money home. In 2019, about 57 percent of the approximately 5 million Indians living in the US had lived there for more than a decade. A World Bank report states that many earned graduate degrees during this time, preparing them to rapidly become high-earners.
The Indian diaspora in the US is highly skilled. In 2019, 43 percent of Indian-born residents of the US had a graduate degree, compared to only 13 percent of US-born residents. According to Indian-born residents aged 25 and older, only 15 percent have a high school diploma or higher, compared with 39 percent who have a college degree. According to the US Census Bureau, 82 percent of Indians are proficient in English (compared to 72 percent of Asians) and 77 percent are foreign-born.
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, compared to about $70,000 for all Americans. Remittances related to high-salary jobs, particularly in the service sector, have accelerated due to structural changes in qualifications and destinations.
The trend of high social mobility among NRIs in the US will only be enhanced by Indian students choosing to study in developed countries.
Especially as NRIs earn more in developed countries, remittances will grow as well. This is an opportunity India can take advantage of by using modern fintech tools like UPI payment linkage, which are faster and cheaper than traditional methods like SWIFT. UPI PayNow will definitely help India to boost Indian economy.