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INDIA TODAY - The most widely read newsweekly in South Asia.
     CURRENT ISSUE DECEMBER 25, 2006
 
   BUSINESS & ECONOMY: FOREIGN REMITTANCES
 

For Home, A Fistful Of Dollars

With Indians working overseas sending money back home, forex inflow is rapidly increasing. While this will help the country cope with its trade deficit, can such remittances actually aid development?

 
  PICTURE SPEAK

DOLLAR POWER: Sardool Singh with family

SARDOOL SINGH, FARMER. A flow of Rs 15 lakh per annum has not only enabled him to double his farming, but also rebuild the old house and buy luxury goods.

"The money helps me tide over the occasional loss in potato crop."

John Freeman may be a pensioner living in idyllic southern town of Trichy, but even after retirement his lifestyle has not changed. Thanks to the remittances his two sons send him from overseas, Freeman doesn't need to scrounge on basics or luxuries. With this year's allowance, he's rebuilding his old family home. In fact, the likes of Freeman have sparked off a construction boom in this sleepy temple town, as is the case with most immigrant towns. The all-pervasive presence of US dollar is visible across Trichy, which has exported a large number of skilled workers to Europe and the US since the mid-1990s.

Up north, the story of Sardool Singh, a farmer in the rich Doaba belt in Punjab, is no different-courtesy his brothers. With at least one family member settled abroad, almost all the 150 households in Seham are recipients of foreign remittances, with which 'locals' can afford most urban luxuries in their own hamlet. While the domestic per capita income is still low, people living in these areas are the biggest consumers of premium products. India's migrant population, estimated to be around 2.5 crore, is making the country's forex registers ring like never before and these inflows are changing the lives of millions. While most states do not document the exact impact of inflows, Kerala has been conducting a study to demonstrate the economic impact on its districts. According to the research conducted by Centre for Development Studies (CDS), Kerala receives Rs 18,465 crore per year in remittances. Professor Irudaya Rajan, who is writing a book on the impact of remittances on the state's economy, says: "If this amount is distributed among the 32.5 million (3.25 crore) people of Kerala, it would give each person in the state about Rs 5,678 per year or Rs 473 per month, which is sufficient to buy about 40 kg of rice per month." Remittances constitute about 22 per cent of the net state domestic product for Kerala. Exports of cashew kernels and marine products are two major forex earners in Kerala but remittances in 2003 were 15 times the export earnings from cashew and 18 times those from marine products.

  PICTURE SPEAK

SMILE IS BACK: Miraz Hussain’s family

HUSSAIN FAMILY, EMBROIDERS. Since Miraz Hussain went to the UAE, his monthly remittance of Rs 10,000 has changed life for this Lucknow family of 13.

"We are saving to buy a small embroidery shop."

With higher disposable incomes, immigrant pockets like Doaba, north Kerala, Andhra Pradesh and Tamil Nadu are voracious consumers of premium products and services. Punjab, for instance, contributes around 26 per cent to the northern sales of Samsung, while Hyderabad shares 23 per cent of southern sales. Explaining the growing affluence, R. Zutshi, deputy managing director of Samsung India, says: "The contribution to sales of our premium products is very significant from Tamil Nadu, Andhra Pradesh and Punjab, where the remittance inflow is growing." Recently, Tamil Nadu's share in the revenues from premium products rose to 43 per cent. Kerala is the biggest consumer of paints, thanks to the housing boom in the state.

Over the last two years, foreign remittances have increased dramatically to displace other big recipients like China and Mexico. India's share of remittances has nearly doubled from a modest $13 billion (Rs 58,000 crore) in 2001-02 to $24.5 billion (Rs 1,09,505 crore) in 2006-07, which is more than the combined foreign institutional investor and foreign direct investment (FDI) inflows at $14.5 billion (Rs 64,814 crore). A big driver of this increase has been the steady demand for white-collared workers since the mid-1990s. Says Manish Misra, head of remittance division at ICICI Bank: "A large part of the remittances are coming in through the banking channel, and the average size of a transaction is $1,000 (Rs 44,685)."

  PICTURE SPEAK

NEW LIFE: Patel with wife and son

BHARAT M. PATEL, BUSINESSMAN. Started a pharma agency in Nadiad from an annual flow of $25,000 from his US-based brother.

"I have come a long way in the shortest possible time."

This trend is in sync with the global trend of remittance flows beating the portfolio and development aid. In 2004, global remittance flows stood at $167 billion (Rs 7,45,922 crore), while the global flow of development aid was at $78 billion (Rs 3,48,582 crore) and foreign investment was at $166 billion (Rs 7,41,851 crore). Harsh Lambah, country head of money transfer company MoneyGram, says: "With more and more Indians migrating overseas, fees charged for money transfer has come down as the industry has become more competitive."

Post-9/11, the Central governments globally made official money transfer more competitive to curb hawala transactions. Earlier, almost 25 per cent of the principal amount was charged as fees but now this is down to 10 per cent while players like MoneyGram charge as less as $19 (Rs 850) for every $2,000 (Rs 89,382) remitted.

With 18.5 crore migrant workers around the world remit to their home countries, the biggest by-product of this dollar affluence is the rise in consumption. Siwan, a district in Bihar, with a population of 2.7 lakh, is a case in point of such development where only 21 per cent of the houses are kachcha houses, while 34 per cent are semi-pucca and 45 per cent pucca houses. About 69 per cent of the households have a bicycle, while 39 per cent have radio/transistor and 23 per cent own fans. Another 22 per cent each report owning sewing machine and TV sets.

Even as the Government talks of an inclusive development, expatriates are transforming sleepy districts like Siwan, and Gorakhpur and Azamgarh in Uttar Pradesh into new consumption capitals, where per capita income has gone up substantially. For instance, the income of an average person of Thrissur in Kerala increases by more than Rs 10,000 per year if remittances are included in his per capita income, while districts like Wayanad have much lower domestic per capita income due to poor migrant traffic.

With lower transport cost, migration patterns have also changed and many more people from newer places such as "eastern Uttar Pradesh, Bihar and West Bengal are seeing outward traffic of workers and inward flow of money," says Suvodeep Das, marketing head of Western Union. According to market estimates, a place like Siwan receives $30 million (Rs 134 crore), while Gorakhpur earns $15 million (Rs 67 crore) and Bogula in West Bengal gets $12 million (Rs 54 crore) per annum from remittances.

Economists and money transfer organisations believe most of the remittance money is used for subsistence since little development aid reaches these remote areas. However, from time immemorial there has been a debate on what is defined as productive use of such income. For instance, a World Bank research shows remittances to Punjab in 1970s triggered the Green Revolution, while they resulted in mindless investment in real estate in Mirpur across the border. Dilip Ratha, senior economist at the World Bank in Washington, believes that the positives of private inflows far outweigh the negatives and help reduce poverty and improve school enrollments. He says: "While it's true that remittances can make people dependent, its impact on productivity is not clear." The relationship between remittances and development remains complex since it's not properly documented.

Besides impacting family incomes, high forex receipts have a tremendous impact on the country's balance of payments. The Reserve Bank of India (RBI) states that inflows in the form of remittances have stabilised at around 3 per cent of GDP since the latter half of 1990s. "They have offset India's merchandise trade deficit to a large extent, thereby keeping current account deficits modest through 1990s."

To understand the true significance of remittances, a comparison with the software sector would help. The RBI figures show that during April-December 2003, earnings from software amounted to $8.63 billion (Rs 38,568 crore), while private transfers during the same period were over $14.8 billion (Rs 66,142 crore). Remittances were sufficient to finance the entire merchandise trade deficit for India for the period.

The biggest advantage of these flows is their stability, which has helped the rupee stay strong despite a ballooning current account deficit, thanks to increased imports. While higher inflows may boost domestic consumption and help India manage its widening current account deficit, if the inflows keep increasing there are strong chances of the rupee appreciating against the dollar. This may hurt Indian exports as this appreciation will not be on the back of trade surplus. Ajit Ranade, chief economist with the Aditya Birla Group, says: "Today, remittances into India are larger than software exports of $23.6 billion (Rs 1,05,529 crore), but the rupee hasn't appreciated because imports are still higher and deficit is widening." Evidently, while such inflows help in coping with the deficits, governments should not become dependent on such inflows and focus on fiscal discipline.

-with Subhash Mishra, Ramesh Vinayak and Uday Mahurkar

 

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INDIA TODAY - The most widely read newsweekly in South Asia.
CURRENT ISSUE
DECEMBER 25, 2006
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