The money transferred to India for personal purposes by non-resident Indians (NRIs) is called remittance. Remittance is considered a major source of income for people who depend on their family abroad, especially for middle- and lower-income families. No wonder India is the largest recipient of remittances in the world. In the year 2021, it received USD 87 billion, with the USA being the major source accounting for almost 20% of the remittances. China and Mexico follow India with USD 53 billion and the Philippines with USD 36 billion. Find out more about remittance in India, its importance, and different ways of remitting money to India.
Meaning of remittance
Remittance is a non-commercial transfer of money from a person to family or friends living in another country. But according to the Reserve Bank of India (RBI), remittances also include withdrawals and redemption of non-resident deposits and gold and silver carried in baggage from abroad.
In the last ten years, remittances to India have grown at a compound annual growth rate (CAGR) of 2.4%. In other words, the remittances have increased by an average of 2.4% each year from 2012 to reach USD 87 billion in 2021.
Remittance to India in the last ten years
Source: World Bank
But why are remittances increasing in India?
There can be several reasons why remittances are increasing in India:
- Supporting family in India: Going abroad and earning money is an age-old practice. Emigrants send money back to their families to support them financially. India has witnessed an increase in the number of people going abroad to study or work. In just 2021, more than 4 lakh students left India to study abroad. Imagine the number of students who left abroad in the last ten years and settled there!
- Increasing investing opportunities for NRIs: The Foreign Exchange Management Act 1999 allows NRIs to invest in India. From time to time, the act has been updated to include more investments under the NRI umbrella. Some of the investments available for NRIs are mutual funds, equity, fixed deposits, and real estate. With increasing opportunities, NRI's investment in India is also going up, thus increasing foreign remittances.
- Paying back student loans: Indian students studying abroad pay back their loans usually from the income they earn in the foreign country. Hence even, this is contributing to the growing remittances in India.
- Depreciating rupee: In the last ten years, the rupee depreciated by over 50%, from Rs 53 in 2012 to Rs 81 in 2022. Historically, a depreciating rupee has resulted in increased remittances from NRIs. This will help NRIs pay off their domestic loans and invest in Indian investments at a lesser value. This can be one of the reasons why remittances are increasing in India.
Why are remittances important to an economy?
Inward remittances are essential for a developing country like India. They are a significant contributor to money flow between countries. Moreover, remittances form a large portion of a global movement of funds. India being the leading receiver of remittances, has largely benefitted from them. The following are the reasons why inward remittances are important to an economy.
Helps economic growth
Inward remittances help boost the Indian economy. When money is remitted to India, it is used for consumption or investment. The GDP increases if the recipient family uses it to purchase goods and services. In contrast, if it is invested, then it leads to higher income for the recipient. Both help in the growth of the economy. India’s Gross Domestic Product (GDP) is USD 3,170 billion (USD 3 trillion) in 2021. Inward remittances to India in 2021 account for 2.74% of the GDP. Growth in inward remittances will lead to growth in the GDP of India.
Support balance of payments
Balance of payments is the difference between the money entering and exiting the country. It indicates whether the country is in deficit or surplus. A country is in deficit if it imports more goods than it exports. In contrast, if a country's exports exceed imports, it is in surplus. Increasing inward remittances help in reducing the current account deficit as the country will receive more money in foreign currency.
India’s current account deficit was USD 23.9 billion for the April – June quarter of 2023. The private transfers, including remittances, increased by 22% from a year ago to USD 25.6. The current account deficit would have been close to USD 50 billion without the remittances.
Helps maintain foreign reserves
Remittances are in foreign currency and hence help a country build its foreign reserves. In its absence, the country has to export more goods to earn more foreign currency. India needs forex reserves to meet its foreign currency obligations, for trade, and to maintain liquidity in case of an economic crisis.
As per the latest data released by the RBI, India’s forex reserves stood at USD 531.081 billion as on 28 October 2022. The 2021 remittance amount was USD 87 billion. If we take a ratio of remittance and total forex reserves, it is 15%. This means India is getting 15% of its forex reserves from personal remittances alone; that's a huge share.
Stabilize the value of the rupee against the US dollar
Inward remittances are more stable than capital flows like Foreign Direct Investment (FDI), often called hot money. If India's economic conditions worsen, foreign investors pull out money, weakening the domestic currency. On the other hand, remittances cannot be repatriated back. A country with high forex reserves can stabilize its currency.
If India has more forex reserves and the rupee is weakening, the RBI can sell dollars, get rupees in exchange, and strengthen the rupee by tightening the money supply. Alternatively, the RBI can buy forex reserves to depreciate the Indian rupee to boost exports and increase its forex reserves. With high inward remittances, the RBI will have enough forex reserves to stabilise the rupee.
Support to the recipient during economic hardship
When NRIs send money to India, it is usually to support their family. The money they send helps the family during economic hardships and raises their standard of living.
History of remittances
After India opened up its economy to the world in 1991 with its economic reforms, the remittances in India grew sharply. In the year 1991, the inward remittances to India were USD 2.1 billion. Over the years, this number grew sharply, and in 2021, the remittance to India was at USD 87 billion. This is higher than the Foreign Direct Investment (FDI) inflow which is USD 84.8 billion for the year 2021-2022.
Migrant unskilled workers previously drove the growth in remittances. However, over the years, skilled employees working abroad from the Information Technology (IT) industry have become a major contributor to remittances. Apart from this, growing investment opportunities in the country have also contributed to growth in remittances. From the de-regulation of interest rates for NRE and NRO accounts in 2010 to introducing mutual funds under NRI investors' radar, RBI has taken steps to increase remittances in India.
Different ways of remitting money to India
Inward remittances can be received only through two ways in India: Money Transfer Service Scheme (MTSS) and Rupee Drawing Arrangement (RDA). Both allow only personal remittances such as family support, gift, education, medical treatment and donations.
Currently, one can use any of the four methods to remit money to India.
- International money order: The oldest way to send money is through a money order. It is also the cheapest and safest way of sending money. A person can send money internationally through a money order without a recipient bank account. The money order can be deposited in a bank or encashed at cheque-casing locations.
- Demand draft: A demand draft is a safe way of transferring money to a beneficiary. Though it is a time taking method, many still use it. Hence over the years, banks have introduced online demand drafts, which are comparatively faster but equally safer.
- Wire transfers: Money transfers from one entity to another through SWIFT or Society for Worldwide Interbank Financial Telecommunication network. There is no actual transfer of money. It is simply deducted from the sender’s account and added to the recipient’s account. It takes five or more days for a wire transfer.
- Online transfer: Over the past few years, online transfers have become popular. They are a fast, easy, and safe way to send money internationally. With intense competition, online transfers are also available at competitive rates.
With technological advancements, remitting money has become convenient. It is also available at competitive rates. All traditional methods are witnessing a technological upgrade. For example, a demand draft can now be used to send money online, which is faster and more convenient than the traditional offline method.
Though digital transfer has been available for the past few years, it is being widely used post-lockdown. Covid-19 has accelerated the shift towards digital payments, which helped India maintain its remittance flow. This is just the beginning. People will prefer sending money through digital methods as digitalization increases due to its convenience.
Future of remittances
Remittances is very important to the Indian economy. With more Indians living abroad, the remittance flow is most likely to go up. By 2022, the remittance is expected to grow close to 3% to USD 89.6 billion. This growth will mainly be driven by growth in digital transfer. With rapid advancements in technology, remitting money to India will be easier, faster and cheaper than ever, encouraging NRIs to use formal methods over informal methods.
Top Countries with Most Remittances
India has been the world's largest recipient of remittances for a long-time now. Despite Covid-19, India's remittances proved resilient and increased by almost 5% in 2021. India's closest competitor China received only USD 52 billion. Here's the list of the top 10 countries with the most remittances in the world for 2021.
Source: World Bank
Frequently Asked Questions
Which country sent the highest remittance to India?
In 2021, the USA was a major contributor to remittances. It accounted for almost 20% of the remittances that India received.
Which country sent the lowest percentage of remittance to India?
According to RBI Remittance Survey 2020-2021, India receives the lowest remittances from the Philippines.
How does remittance help India’s economy?
Inward remittances help in economic growth, stabilize the rupee against the dollar, support the balance of payments, and help maintain forex reserves.
Which country is first in remittance?
India is the world's largest recipient of remittances. In 2021, it received USD 87 billion in the form of remittances.
Which country is best for remittance?
India has a very low remittance cost and is considered best for remittances.
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