The single-largest source of foreign capital into India, non-resident Indians, may one day become the prime source of investment in the domestic economy. A new report on remittances to India says "NRIs now see India as an investment destination" and are already leaving their mark in real estate and the stockmarket.
Muzaffar Chishti of the Migration Policy Institute, author of "The Phenomenal Rise in Remittances to India: A Closer Look," says the most striking evidence of the fact that NRIs are seeing the Indian economy as an opportunity is the rise of so-called "private transfers."
There are two main types of NRI remittances. The most well-known type is "inward remittance" i.e. when an NRI wires or sends money to an individual in India, usually a relative. The other type is "private transfer" i.e. when an NRI deposits foreign exchange into a rupee account and then spends it inside India.
The little-noticed trend, says Chishti, is how fast private transfers have grown. Between 2000-01 and 2005-06 private transfers grew by 88 per cent, more than double the rate of inward remittances. The former exceeded the latter by $ 2.3 billion last year.
The other trend is that North America, by far, is the largest source of remittances – 44 per cent of the total. The Persian Gulf, which once dominated remittances even 10 years ago, is the source for only 24 per cent.
Unlike the traditionally working-class Indian population in the Gulf, the middle-class North American NRIs are more likely to see India as a place for long-term economic investment. Nearly a third of all remittances are over $ 2,200.
In other words, NRIs are bringing in billions of dollars, converting them into rupees and personally spending them inside India. Chishti cites real estate experts as saying 20 per cent of all properties being sold for over $10 million in Delhi are being bought with NRI funds. "In the end, no one knows where or how much NRIs are investing in India," he says.
The amount of money concerned is enormous. Last year remittances to India totalled $ 24.6 billion, more than foreign direct investment or foreign institutional investment. Private transfers, which overtook inward remittances only in 2003-04, alone totalled about $ 13 billion last year. India received $ 15.7 billion in FDI equity flows during the same period.
The amount of money NRIs are transferring is still growing. Western Union, the world’s largest wire transfer company with $ 4 billion in revenues, says it saw a 102 per cent increase in person-to-person remittances to India last year.
In the first quarter of this year, says company spokesperson Erenay Jackson, global transfers to India were "94 per cent higher than the same quarter last year."
The company declines to say how much of its revenue comes from India, only saying 5 per cent of its revenue came from China and India.
NRI investment in India, believes Chishti, is a vote of confidence in the new Indian economy. In the past, India’s rigid foreign exchange controls, the volatility of the rupee and the lack of growth meant NRIs would keep their money in repatriable foreign exchange deposits (counted as debt by the RBI and not included in remittance figures) rather than convert their money into rupees.
Joydeep Mukherji of Standard and Poor’s notes that the recent rise of the rupee would have provided a strong incentive to convert dollars in NRI accounts into rupees.
Another factor was 9/11 which drove some remittances out of the informal hawala market. Western Union, for example, experienced a surge in money transfers to South Asia as anti-terrorism finance laws were introduced across the world.
Chishthi is critical of the government’s lack of imagination on using NRI remittance for development purposes. For a while the surge in personal transfers was explained away as being overseas Indians cashing in various NRI-targeted bond issues.
But the surge continued even in years when no bonds were maturing. "Official policy has long focused on deposits. The real story is remittances," he says.