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How remittances affect the Indian economy

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  • How remittances affect the Indian economy

    India has made a remarkable progress in the last four years, thanks to the following two factors: liberalization of the economy and increased FDI (Foreign Direct Investment). There is a third factor, which is least understood and is least talked about i.e. remittance from abroad. Twenty five million NRI’s (Non Resident Indians) sent close to $22 Billion back home in 2005. These amounts together with FDI provided the impetus to the economy and raised the GDP growth level to well above 8%. Remittances also saved the country from a possible economic cat*****phe in 1998-2000 period when Clinton Administration imposed economic sanctions on India, following the nuclear test. Vajpayee government needed about $20 billion a year to continue with its economic agenda. These funds were provided through remittance from abroad. Hence the initial phase of economic liberalization took shape. Later, in years 2000 & 2001, the Bush Administration removed most of the sanctions, and so the economic progress continued. As years passed, remittances continued to swell; this became the engine of economic growth and prosperity. Today, India has the largest share of remittance from abroad from a total of about $100 Billion. China & Mexico are close behind.

    Who Sends What?

    Before the IT & BPO revolution began in 1999, much of the migrant workers of Indian origin were in Middle East, Saudi Arabia, Kuwait, Dubai & Bahrain (Gulf Region). They were there with the soul purpose of making money and remitting it home. Local laws did not permit the workers any political rights, hence almost all of them wished to collect as much money as possible and then return home. Returning workers were replaced with fresh recruits and this continued for the last thirty years. India was not the only country benefiting from this bonanza. Citizens of Pakistan, Philippines, Bangladesh, Arab nations without oil wealth also provided temporary labor force. Elsewhere immigrants to US, Canada and UK also added to the remittance kitty. Workers in Middle East differed from their counterpart in Europe & US (Canada included) that the former stayed on temporary work permit; the latter came to make the new places their homes. The latter group was the prosperous kind and had extra cash, which they remitted home to the next of kin. Starting from 1997 onwards, a third kind of cash remitters appeared on the scene. They wore three-piece suit and were invited by the nations in Europe and North America to remedy IT and Y2K issues. This highly paid group came in for a period of two, four or six years and remitted huge sums of money home. With FDI, remittance and direct aid, India had about $30 to $35 billion available at its disposal for development. Remittance also swelled the foreign exchange reserves, and permanently took India out of its financial crunch of early nineties. Today the foreign exchange reserves are at about $160 billion. This allows a bit more flexibility for the Indian government in project finance and bulk purchases.

    Of the $22 billion remittance received in 2005, about 60% came from Europe & North America and 40% came from Middle East. It is a big amount and all players including remittance agencies wished to grab a piece of this action. Almost all commercial banks requested the Reserve Bank of India for minor change in rules to permit them to enter the remittance market. They designed products to grab a bigger and a bigger piece of the remittance business. Other unofficial channels like Hawala have a significant amount of business. They operate only on remitting small amounts of money in a money order type of transfers. Prior to big banks entry into the remittance business, Hawala enjoyed considerable clout. Now it is the choicest mode of money transfer for terrorists and intelligence agencies. Banks like ICICI, State Bank and UTI Bank are the big operators. They are offering Quick Remit Online Settlement Service, Remit Card, web based remittance etc. These schemes directly transfer money to India either to themselves or their family or business associates.

    Who holds this money in India and how does this money get invested in the economy

    Small sums remitted invariably ends up in the real estate, vehicle purchase, tourism and donations to charity or family. There investments have pushed up the real estate values in Delhi, Mumbai, Goa, Punjab and Kerala through the roof. Since this sector is not controlled by any legislation hence real estate is one of the most attractive form of investment for the individual NRI investor. Others prefer to keep the money in the bank at a fairly high interest rate, hence indirectly allow the banks to invest on their behalf.

    The Finance Ministry has announced a host of new instruments to channel remittance from abroad. This sector needed a fresh bureaucratic look as a mountain of money had started to arrive. Once new rules were in place (2005), it became possible that other sectors of the economy to benefit from this bonanza. Schemes are being designed to use this cash to rebuild the crumbling national infrastructure or invest directly into the industry and business via stock market investment (via FII). No wonder the stock market took off in 2004-05. In US and Canada, stock instruments are being sold to individual investor to invest directly into Indian stocks. In addition insurance sector is gearing up to receive a part of this money. They are aware that almost all the temporary workers in the Middle East and some elsewhere are under-insured. They need insurance. Creative products are being designed to entice them into insurance.

    Larger NRI investments from the big leaguers in the industry are ready to invest in form of partnership in healthcare, power, roads, ports and airports etc. All the above one way or the other is finding its way into the industrial and business activity.

    Long-term Sustainability of Remittance at these High Levels

    Long-term sustainability of remittance is dependent upon availability of highly skilled labor to work in Europe, North America and Middle East. The last attracts unskilled, semi-skilled labor. There is no shortage of the latter in India. It is the former i.e. highly skilled IT professional which are in short supply in India. Hence, if a portion is sent abroad, it has to be very quickly replaced for the home market. Indian IT exports are dependent upon not only Indian IT professionals traveling abroad but also staying at home and continue the great work they are doing. These factors together with unhindered availability of Visas to travel and stay in Europe and America will continue to swell the remittance kitty. To-date India enjoys the maximum number of H-1 visas granted by the US government. At times the elected leaders in the US Congress do show independence from the executive branch and hold up Visa enlargement legislation. They are listening to the local pressures of job losses and contracts being awarded to foreign companies. They usually relent after their point has been made to the satisfaction of the agitated public. Afterwards the visa applications for work are accepted as usual.

    Sudden surge in oil prices has brought a huge cash flow to the Arab states. Their coffers are brimming with extra cash. They need labor to add more services to their already very comfortable life style. This labor will come from India, Pakistan, Bangladesh and Philippines. All these countries are too willing to oblige. Hence, remittance is likely to increase. India will be at the receiving end of bigger bonanza for the next few years.

    Hence short term – 5 to 10 years prognosis of remittance from abroad is very good. Farther from this period, it is hard to forecast. IT business may see emergence of other competitors and labor export to Middle East may suffer with oil wells drying up and reducing cash inflow to the Arab states. But nobody is forecasting beyond 10 years today.

    India Diaspora Abroad & Government’s Special Treatment to Them

    Rough estimates put Indian Diaspora abroad at about 25 million. Of this 3 million live in North America and 2.5 million live in the Gulf region. In 2004, government set up a new ministry to deal with them. Pravasi Bhartiya Diwas have been organized in years 2005 and 2006 and two before that. High importance is attached to these celebrations. The Indian Prime Minister attended the 2006 meeting in Hyderabad. A much-awaited Dual citizenship for Indian immigrants is the right step in this direction in consolidating and harnessing energies of the Indians abroad.

    Indian Diaspora is proving useful to India when the going is tough. Quite a bit of effort has been put by the Americans of the Indian origin in getting the Indo-US Nuclear deal through the lower house of US Congress. A similar effort is underway to get a backing in the Senate. As the “Indian” get prosperous, they have developed a fondness for politics. Both US political parties actively canvass for Indian support. Canada has elected a number of MPs of Indian origin to its Parliament. All this has been made possible with the considerable financial clout of the Indians and dumping of the petty politics in favor of mainline progressive policies.

    In short, remittance from abroad to India will see new heights in the coming years. All this is needed to build the infrastructure and push the economic development well above 8%. In addition the economic lot of small remittance recipients has improved as they have paid of their debts, built new houses or sent children to acquire better and better education. Remittance is good news for its recipients, industry & commerce and government’s financial well being. It is one engine that is least understood and for the last 20 years mostly ignored.

    Do your part, remit now.
    Last edited by leifbooger; 11-23-2006, 05:49 PM.

  • #2
    India's GDP grows 9.2% in second quarter

    India's GDP grows 9.2% in second quarter
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    Economy grew by 9.2 per cent in the July-September quarter from a year earlier, higher than market expectations.

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