In a September 2023 paper titled “Resilient Remittances,” authored by Dilip Ratha, the lead economist at the World Bank, the International Monetary Fund (IMF) emphasized the crucial role played by remittances in the development of economies.
These remittances, sent by migrant workers back to their families, provide essential income to millions of households, often overlooked despite their significant contribution. According to the paper, global remittances reached a record $647 billion in 2022, three times the official development assistance (ODA) provided by multilateral agencies.
Remarkably, remittances remain stable even during crises in the source or recipient countries. For instance, amid the COVID-19 pandemic in 2020, while global income dropped by 3%, remittances only fell by 1.1%.
India stands as the world’s largest recipient of inward remittances, receiving over $100 billion in 2022, a figure that has since grown to $111 billion according to the World Bank’s Migration and Development Brief, expanding at a rate of more than 12%. These remittances have significantly bolstered India’s foreign exchange reserves, currently totaling around $586 billion, constituting over 18% of the country’s reserves. Remittances also account for nearly 3% of India’s GDP, acting as a crucial buffer for the external sector, especially when faced with an increasing trade deficit of $19.37 billion.
It’s noteworthy that the USA, not the UAE as commonly believed, is the major source of remittances to India, contributing nearly 23% of the total. These remittances mainly come from highly educated, well-placed Indian professionals working in the USA, contrasting with the lower-skilled, informal employment profile of the Indian community in Gulf countries.
However, a significant concern lies in the informal channels of remittance, popularly known as “hawala,” which operate outside the regulated banking systems. Estimates of remittances lost to hawala vary, ranging from 5% to 20.7% of India’s GDP according to different studies. The prevalence of hawala is linked to activities like gold smuggling, with settlements often conducted through these illegal channels. Despite the growth and accessibility of banking channels, hawala remains popular due to its ease, speed, flexibility, and lower costs, reflecting the need for banks to enhance their services to compete effectively.
One challenge faced by legal channels is the stringent regulatory requirements, deterring genuine customers from using them. Banks must adopt a risk-based approach to streamline these requirements. Additionally, the exchange rate plays a significant role, with migrants seeking the best rates, whether legally or illegally. Encouraging the use of digital wallets accessible both in India and abroad could mitigate hawala transactions.
Given the increasing trend in migration and remittances, it is imperative for the government to make legal remittance channels more convenient. This would not only bolster foreign exchange reserves but also reduce black money within the country.