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Remiss on remittances

The most surprising fact about remittances to India is not their volume but the level of ignorance of what the money is actually used for.

india Updated: Mar 24, 2008 22:57 IST

The most surprising fact about remittances to India is not their volume but the level of ignorance of what the money is actually used for. The dollars and dinars sent by overseas Indians are the country’s single largest source of foreign exchange, dwarfing both foreign direct investment and foreign portfolio investment. This has only been underlined by the World Bank’s recent estimate that India received $ 27 billion in remittances last year, the largest amount for any developing country. The actual figure is even larger: the World Bank does not include informal repatriation channels like the hawala market.

Nonetheless, New Delhi is largely clueless as to what this huge amount of capital does within the economy. It is already evident that the nature of Indian remittances is changing dramatically. Twenty years ago, the vast bulk of these remittances came from Indian workers in the Persian Gulf. Today, Indian professionals based in the US are the ones who send back the most amount of money — nearly half the total, according to RBI figures. The growth of such remittances has also been dramatic. The total amount doubled between 2000-06. As indicated by a Migration Policy Institute study last year, remittances are no longer just about paying for a relative’s wedding or house addition. An increasing amount is being invested in the stock market and real estate.

The latter trend opens the door to using remittances to pay for badly needed investment, perhaps even in the social sector. However, it could also mean remittances will become increasingly susceptible to the Indian economic cycle. Traditionally, remittances are unaffected by the health of the economy. Overseas transfers have been a silent saviour of India’s economy, helping compensate for India’s weak trade performance and even weaker foreign investment policies. The L.M. Singhvi Committee report helped focus the government on the utility and potential of such flows. But the character of remittances is changing as rapidly as the global economy itself. That New Delhi is hazy about even the most basic remittance data — in other words, clueless about the country’s single most important source of external capital — is economic governance of the worst form.