Syllabus:GS3/Economy
Recent Context
India is the world's largest remittance recipient, with a projected influx of $129 billion by 2024. India is followed by Mexico, China, the Philippines, and Pakistan.
What is Remittance?
Remittances are the funds/money sent by individuals working overseas (foreign countries) to their families and communities in their home country (e.g., India). Remittances account for about 3% of India's GDP.
India's Dominance in Global Remittances
In comparison to previous years, India's remittance growth rate has risen dramatically, rising 5.8% in 2024. Remittances to India amounted to US$110 billion in 2022 and US$125 billion in 2023.
The post-COVID-19 global economic rebound and rising migrant worker employment are two elements driving this growth.
Global Comparison
In terms of remittance receipts, nations like China, Mexico, the Philippines, and Pakistan lag behind India. Nonetheless, India continues to get far larger inflows, which is indicative of its dominant position in the global remittance economy.
Key States: Dependent on Remittances
States that contribute significantly to foreign labor and rely significantly on remittances include Kerala, Uttar Pradesh, Tamil Nadu, Bihar, and Punjab. Remittances account for 15% of Kerala's GDP.
Regional Trends
Remittance growth is expected to increase significantly from 1.2% in 2023 to 5.8% in 2024. In 2024, official remittances to lower-middle-income countries (LMIC’s) are projected to reach $685 billion, with South Asia seeing the most rise at 11.8%, primarily due to significant inflows to Bangladesh, Pakistan, and India.
Over the previous 10 years, remittances have surged by 57%, while other financial flows, such as foreign direct investment (FDI), have fallen by 41%.
The recovery of job markets in high-income OECD nations, especially the US, where employment of foreign-born workers has risen by 11% over pre-pandemic levels, is a major factor in this growth. This has considerably boosted remittances to places such as Latin America and the Caribbean.
Main Factors Influencing Remittance Growth
Job Market Recovery in High-Income Countries: One of the main drivers has been the revival of job markets, especially in high-income OECD nations like the United States. Employment of foreign-born workers has increased by 11% over pre-pandemic levels, which has increased migrant incomes and remittance inflows.
Migrant Workers' Employment Has Increased: Increased employment for migrant workers in North America and Western Europe due to high demand for labor in industries including healthcare, construction, and services has increased remittances to South Asia, Latin America, and Africa.
Better Post-Pandemic Economic Recovery: Remittance inflows to developing countries have increased as a result of the global economic recovery from COVID-19, which has increased disposable incomes and job prospects in high-income countries.
Technological Progress in Transfer Methods: Digital payment systems and mobile money services have made remittances faster, cheaper, and more convenient. This invention has lowered transaction costs and increased remittance volumes.
Currency Depreciation in Lower-Income Countries: Currency depreciation in low-income nations has increased remittance inflows since migrants profit from higher value conversions, which boosts receivers' purchasing power.
Governmental Initiatives and Policy Support: Policies such as lower transaction costs, financial inclusion programs, and incentives for formal channels have encouraged migrants to utilize official remittance services, adding to the increase in remittances.
Significance of Remittances
Remittances play an important role in the economics of many countries, particularly developing ones like India.
Poverty Reduction: Remittances serve to alleviate poverty by providing necessary money for families, allowing them to meet daily requirements, access education and healthcare, and enhance their standard of living.
Economic Stability: For many countries, remittances constitute a consistent and predictable source of foreign cash, helping to maintain overall economic stability, especially during times of crisis.
Support for Local Businesses: The flood of remittances can benefit local businesses since families frequently use the money to purchase products and services, hence increasing demand in the market.
Investment in Education and Health: Many remittance-receiving families invest in their children's education and health care, resulting in better long-term human development.
Infrastructure Development: Remittances are sometimes utilized to develop homes and invest in local infrastructure, which improves the quality of life in communities.
Enhancement of Financial Inclusion: Because remittances pass through official financial institutions, they contribute to financial inclusion by allowing beneficiaries to access banking services and credit.
Challenges in Remittance Flow
High Transaction Costs: Despite technological developments, sending remittances remains expensive in some corridors, limiting the amount received by recipients. The World Bank intends to lower remittance costs to less than 3%, although worldwide averages remain above 6%.
Dependency Syndrome: Overreliance on remittances can lead to economic weaknesses since countries may rely on external funding rather than supporting long-term domestic economic growth.
Currency fluctuations: Exchange rate fluctuation can lower the real value of remittances, reducing recipients' purchasing power.
Regulatory Barriers:Stringent financial laws and anti-money laundering rules can impede and delay the smooth movement of remittances.
Way Forward/Suggestions
Reducing Remittance Costs: Reduce remittance transfer costs to less than 3% by increasing competition, implementing innovative digital platforms, and streamlining regulatory processes.
Formalize Remittance Channels: Improve banking and mobile payment networks in rural communities.
Improve Financial Inclusion: Offer information and tools for saving and investing. Regulatory simplification: Make it easier for remittance providers to comply while maintaining security.
Economic Diversification: Reduce reliance on remittances by creating local jobs.
Conclusion
Remittances are a lifeline for families and a major contributor to global economic stability and progress. Despite the limitations, developments in financial technology and lower transaction costs promise more efficiency and effectiveness. Nations must use remittances to alleviate poverty, fund health and education, increase financial inclusion, and promote capital market access.
UPSC Mains Model Question
Q. Discuss the factors driving India's dominance in global remittance inflows and analyze the significance and challenges associated with remittances for developing economies. Suggest measures to enhance the effectiveness of remittance flows in achieving sustainable economic development. (250 words)
Comments