Indian Dollar Transfers That Beat Some GOI Welfare Spends

Source: The post is based on an article “Indian Dollar Transfers That Beat Some GOI Welfare Spends” published in The Times of India on 20^th June 2023.

Syllabus: GS 2 – Indian Diaspora

Relevance: benefits of remittances for India and associated challenges

News: India leads globally in remittance receipts, surpassing Mexico and China and it has reduced the cost of receiving remittances.

As per the World Bank, India has reduced the average cost of receiving remittances in the last 10 years from around 9% to 4.65% which is less than the global average of 6.30%.

Why is there a need for lowering the cost of receiving remittances?

Low-cost leads to higher spending power.

Remittances, for India, are a source of external finance larger in size than FDI, portfolio or development assistance flows.

They narrow the current account deficit and being less volatile, provide stability to inflow of forex from abroad.

Studies have shown that remittances play a significant role in poverty reduction and improve health and educational outcomes of the recipient households.

Some calculations have shown that in the last five years, India’s cost reduction has put an additional ₹1.2 lakh crores in the hands of predominantly low-income households.

This is almost double the annual budgetary allocation of NREGA or PM Kisan Samman Nidhi.

What determines the cost of the remittances?

There are two components –1) Transaction fees; and 2) Foreign exchange margin.

Global analysis shows that transaction fees are the prime contributor to the overall cost.

However, after analyzing the cost of remittances in the countries like the US, the UK, it is found that the average foreign exchange margin costs are less than 1% in India.

Transaction fees get higher in cases where the sender and receiver do not have access to formal financial systems and when the services of an agent are involved in the collection or distribution of remittances.

However, globally, average costs are lower when Remittance Service Providers (RSPs) are mobile operators and when remitters/recipients use mobile money as payment instruments.

Further, several factors like regulatory compliance requirements, limited data exchange, non-interoperable technology platforms, and lengthy transaction chains can contribute to increased transaction costs. Insufficient competition among RSPs may also raise costs.

Must Read: Why remittance inflows growth could slow to just 0.2% in 2023

How is India overcoming these challenges?

PM Jan Dhan Yojana and use of direct benefit transfer have been transformative in fostering financial inclusion.

Unified Payments Interface (UPI), accompanied by accessible and affordable telecom services, is deepening the adoption of mobile mode for transactions.

The collaboration between the RBI and the Monetary Authority of Singapore has resulted in the establishment of interoperable linkages between the UPI in India and PayNow in Singapore.

What can be the way ahead?

The fintech sector in India has experienced significant growth which has caused innovative solutions and healthy competition. However, active support from other countries is crucial as one end of the transaction involves the country of the remitter.

Moreover, a significant reduction in transaction costs to 3% could save around $25 billion annually. More than 75% of these savings would benefit developing and least developed countries.

Countries can also learn from India in lowering the transaction cost and achieving the costs lower than the United Nations Sustainable Development Goal (SDG) target of 3%.