On Monday, a World Bank report said that India has retained its position as the highest recipient of remittances in the world in 2018. The Indian diaspora sent a staggering total of $79 billion back to the country last year.
The World Bank says that remittances to low- and middle-income countries reached an all-time high in 2018 with a total $529 billion sent. This is a 9.6% increase from 2017.
A large chunk of this increase—12%—can be traced back to the South Asian region.
“The overall increase was driven by a stronger economy and employment situation in the United States and a rebound in outward flows from some Gulf Cooperation Council (GCC) countries and the Russian Federation”, said the World Bank. The GCC is a political and economic tie-up between Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
The World Bank said that China was the second highest recipient with $67 billion, Mexico placed third with $36 billion, the Philippines followed in fourth with $34 billion, and Egypt came fifth with $29 billion.
In general, global remittances peaked at $689 billion in 2018, higher than $633 billion in 2017.
India as the highest remittances
Remittances are funds that come from migrants working in foreign countries to their families and friends back home; sometimes they are financially supporting them. This money takes the form of a gift that does not need to be repaid.
The RBI said that 52% of remittances to India come from the Gulf and West Asia. Most of this money comes from the UAE and Saudi Arabia.
South Asia’s remittance rate grew by 12% in 2018 when people sent back $131 billion. This rate is twice as high as in 2017, when remittance growth was only 6%.
India itself saw a huge surge in remittances that accounted for 2.9% of her GDP in 2018.
“Remittances grew by more than 14% in India, where a flooding disaster in Kerala likely boosted the financial help that migrants sent to families”, says the World Bank.
Stronger economic conditions in the US and an increase in oil prices are two of the major reasons for the positive trend.
Head of Global Knowledge Partnership on Migration and Development (KNOMAD), Dilip Ratha said, “Remittances are on track to become the largest source of external financing in developing countries. The high costs of money transfers reduce the benefits of migration. Renegotiating exclusive partnerships and letting new players operate through national post offices, banks, and telecommunications companies will increase competition and lower remittance prices.”
Pakistan’s remittance growth rate hovered at 7% because of a decline of cash from Saudi Arabia. Remittances to Bangladesh grew at 15%.
Importance of remittances
The World Bank explains that remittances are an important avenue of income in developing countries, because they help alleviate poverty. Low- and middle-income families benefit greatly from remittances sent from abroad because their standard of living.
This spending then has a multiplier effect on the Indian economy and foreign exchange reserves. Remittances also help correct the country’s balance of payments and shrink the current account deficit. It often takes the form of investments in real estate and expenditure on weddings, as well.
Hence, when the rupee fell sharply in 2018, remittances spiked by almost 25%.
Acting Director of the World Bank’s Global Indicators Group, Rita Ramalho says, “Remittances are an important source of income for millions of families in developing countries. As such, a weakening of remittance flows can have a serious impact on the ability of families to get health care, education, or proper nutrition,”
High rates of remittance can even encourage immigration. However, this can also trigger a brain drain in developing countries because skilled workers want to live and work abroad.
The World Bank says that this high cost is related to banks closing down money transfer operator accounts because of strict regulations tackling money laundering and financial fraud. High-income countries are even considering taxing outward-flowing remittances to discourage immigration and raise revenue.
The global cost of sending a $200 remittance is still at a high of 7%. In the three most expensive corridors—African, Sub-Saharan, and Pacific—the cost is as high as 10%. However, Sustainable Development Goal (SDG) 10, which is focussed on reducing inequalities within and among countries, targets at reducing this cost to only 3% by 2030.
Remittances in India to get a makeover with blockchain?
In 2018, Prime Minister Modi planned to amend the Foreign Exchange Management Act (FEMA) to reduce the cost of sending remittances and thereby, control the current account deficit.
For the 2019 Lok Sabha elections, the BJP has announced the Pradhan Mantri Jan Dhan Yojana, a financial programme that hopes to make remittances more affordable for Indians between the ages of 18 and 65.
Along with amending the remittance procedure, the government is also contemplating oil trade with Iran and Venezuela, diamond and gold trade with Russia, and rupee-renminbi trade with China, to help improve the current deficit.
People find it more expensive to remit money when the market becomes less competitive and there is an overall decline of remittances. Dated banking technology also plays a role in making these transactions more expensive and time-consuming.
India’s remittance costs have increased to 5.4% in 2018 from the previous year. For context, corridors in the GCC and Singapore were hitting below the SDG target of 3%. The need to tackle this rising cost is important for India because South Asia’s rate of remittances is expected to rise by 13.5%, says Mint.
CEPR Policy Portal explains that for every $200, the standard for measuring remittance costs, one must may $14 to make the transaction. This fees includes charges by the sending bank, receiving bank, and exchange rate margin.
All together, these charges amount to about 7% of the amount remitted. In 2017, just the total global cost of sending remittances was a massive $30 billion, which is almost equal to the American non-military aid budget.
Although the volume of remittances has swelled over the years, the costs have not declined as expected, because they are a strong source of revenue for middlemen institutions.
Some believe that blockchain is the answer.
The increasing use of blockchain payment platforms like TransferWise and Revolut are poised to make the remittance process cheaper as they remove middlemen and ensure swift transfers, where the money is not impacted by sudden currency fluctuations.
Facebook is also working on a cryptocurrency platform on WhatsApp India. Indians, among whom smartphone use is on a brisk uptick, may find these options more attractive than traditional means of transfer.
However, the RBI has cautioned against blockchain processors in 2018 because of its volatile nature. Coin Central reports that the value of Bitcoin, one of the most well-known cryptocurrencies in the world, fluctuates over 20% every 48 hours.
The apex bank also issued a circular stating that no entities associated with it, such as banks, should be using cryptocurrencies like Bitcoin. Finance Minister Arun Jaitley also said that the Indian government does not recognise cryptocurrencies as legal tender.
The resistance from these institutions may delay India’s cryptocurrency revolution, but it will not banish it entirely because remittances through the traditional banking system continue to be expensive.
Rhea Arora is a Staff Writer at Qrius.