Mumbai: Remittances to India are on the rise, but the bulk of the money flowing into the country is used for consumption and not for creating assets.
A Reserve Bank of India (RBI) study, conducted in November, shows that the Indian diaspora has remitted $46.9 billion (Rs2.09 trillion today) during 2008-09, up from $43.5 billion in 2007-08 and $30.84 billion in 2006-07. Only around 4% of the funds were invested in “land/property/securities” in contrast with a July 2006 study, which found that 20-25% of remittances were invested in local assets.
The latest study, Remittances from Overseas Indians: Modes of Transfer, Transaction Cost and Time Taken, found that 61% of the remittances are utilized for “family maintenance”—to meet the requirements of food, education, health, among others, while an average of 20% of the funds received are deposited in bank accounts.
The study is part of the Indian central bank’s monthly bulletin released on Tuesday.
Economists blamed the stock market crash in the wake of the global financial meltdown that followed the collapse of US investment bank Lehman Brothers Holdings Inc. for the sharp drop in investment in equity.
“Before the global crisis broke out, heavy amount of remittances used to get invested in equity markets and real estate here. I am sure when the sentiments improve, the share of investment will also go up,” said Rupa Rege Nitsure, chief economist of Bank of Baroda.
Nitsure cited an internal study by her bank that was conducted at the behest of RBI in Maharashtra and Gujarat before the crisis. It showed that a large chunk of remittances was invested in stocks and real estate. Studies by other banks also came up with similar findings and that prompted RBI to increase the risk weighting in commercial real estate loans, she said.
The crisis, however, did not affect the flow of money into India for a variety of reasons such as rupee depreciation, a hike in interest rate ceilings on deposits for non-resident Indians since September 2008 and oil-price uncertainties. These “might have induced the workers to remit their money to India as a hedging mechanism due to its relatively better growth prospects”, she said.
While most states were not much affected, Kochi in Kerala, traditionally heavily dependent on remittances from West Asia, faced a substantive decline during the crisis.
According to the study, higher value remittances—that of Rs50,000 and above—constitute 42% of the total with centres such as Ahmedabad, Bhubaneswar, Chandigarh, Delhi and Jaipur receiving more than 40% of their total remittances in individual lots of Rs1 lakh and above.
Remittances with an average size of less than Rs20,000 constitute 43% of the total.
“Frequent remittances of a lesser amount indicate that the remittance is used mostly for family maintenance. However, less frequent and high size of remittances may be directed towards the investment purposes rather than for the family maintenance needs,” the study said.
North America continues to be on top for remittances even as there has been a significant rise in private transfers from the Gulf, Europe and Africa.
North America’s share fell in 2008-09 to 38% from 44% owing to the economic downturn. West Asia accounts for an average of 27% of the total with major sources being the United Arab Emirates and Saudi Arabia. Kochi and Mumbai received more than 50% of their remittances from West Asia and Ahmedabad, Bangalore, Chandigarh, Delhi, Hyderabad and Kolkata received more than 60% of their inward remittances from North America and Europe, reflecting the underlying migration pattern, the study said.
“Remittances are a good way of financing the deficit, but I look at this as potential loss of jobs,” said A.V. Rajwade, an independent foreign exchange consultant. That is because the higher deficit would have forced the government to increase productivity or depreciate the local currency further.
While 63% of transfers happen through SWIFT (Society for Worldwide Interbank Financial Telecommunication) electronically, the instant transfer of money directly to bank accounts is gaining.