WTO backs India’s proposal to cut remittance cost: Developing countries to benefit most; vantage for UPI, say economists
WTO backs remittance cost cut: Reduced transaction costs for trade and business can make Indian businesses more competitive, contributing to overall growth. Lower costs could incentivise formal money transfer channels, potentially reducing reliance on informal methods.
India has garnered support from many World Trade Organization (WTO) members, including the European Union, for its proposal to reduce the cost of cross-border remittances, according to a report by The Economic Times. Except the US, most WTO members have backed India's proposal. A cost reduction can not only increase the inflow of remittance to developing countries like India, but also create vantage for the country's Unified Payments Interface (UPI) for global penetration, economists told Livemint, while speaking on its impact on the Indian economy.
India submitted a draft Ministerial Declaration during the ongoing 13th WTO ministerial conference in Abu Dhabi.
India emphasised the need to lower the costs associated with cross-border remittances. The declaration underscored the significant socioeconomic impact of remittances, especially for developing nations, noting that a staggering 78 per cent of total remittance flows in 2023 went to Low and Middle-Income Countries (LMICs), according to the proposal reviewed by Livemint.
“We reaffirm our commitment to the UN SDG Goal 10.c to reduce to less than 3 per cent the transaction costs of remittances and eliminate remittance corridors with costs higher than 5 per cent by 2030 with a view to achieving the primary goal target, that is, 'reduce inequality within and among countries' which is aligned to the WTO's development agenda,” the draft proposed.
The draft highlighted the disparity between current global remittance costs (6.18 per cent) and the UN Sustainable Development Goal (SDG) target of less than 3 per cent. It also showed the connection of cross-border payments with broader financial inclusion efforts.
“The majority of transfers are done by people from poor countries working in developed nations. The remittance cost is paid by these people working abroad to transfer their own money. The moment we have developed a countries-centric policy, benefits will shift,” said Agneshwar Sen, EY India Tax and Economic Policy (International Trade) Associate Partner.
Why India needs a remittance cost cut
India received the highest amount of remittance inflows globally in 2023, reaching $125 billion, according to a World Bank report. This growth was driven by factors such as agreements with the UAE to promote the use of local currencies for trade and strong labour markets in high-income source countries like the US, the UK, and Singapore.
Last year, the remittance that came in India was around $125 billion and the cost for the remittance was around $7 billion -$8 billion. Once the remittance cost is cut, money that comes into India will go up. When it is cheaper and quicker to transfer money, hawala transactions will decline, Sen opined.
What is the remittance cost, and how is it calculated?
When someone working overseas sends money to their homeland, they are charged a percentage of the amount they send. The cost is incurred by them. The cost of transferring money can vary depending on the amount sent and the method used for the transfer. For smaller remittances, typically under $200, fees can average around 10 per cent, with some reaching as high as 15-20 per cent, according to IMF data. Globally, remittances cost an average of 6.20 per cent of the amount sent.
Who are the beneficiaries of the remittance cost cut?
Lower remittance costs will benefit the global Indian diaspora and their families in India by ensuring that the majority of the hard-earned money goes into personal consumption rather than going to the intermediaries. It will also help the Indian Micro, Small and Medium Enterprises (MSMEs), as reduced foreign exchange costs will make export of goods and services more competitive, thereby increasing their margins, said Neeraj Ssinnha, Partner & Leader, Financial Services, BDO India.
“The macro impact from higher and more cost-effective remittances will be positive with marginal benefits to the domestic currency too,” said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Echoing Ssinnha, Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said that for the Indian diaspora, the possible reduction to 3 per cent should reduce cost and provide further impetus to the remittance-related inflows.”
If the proposal to cut remittance costs is accepted at the WTO, it will largely benefit the NRI community transferring funds to and from India, overseas travellers as well as ODI investors, according to Riaz Thingna, Partner, Grant Thornton Bharat.
How can developing countries like India can benefit from remittance cost cuts?
A remittance cost cut will lead to a big boost for UPI transactions, which has been a game changer in India, and it will have a much greater footprint overseas. This is one more important step forward towards the government’s Ease of Doing Business in India initiative. It will also help the Indian banking sector, which has been at the forefront of technology, to obtain a larger footprint in the global economy, said Thingna.
The widespread backing of India's proposal highlights the global acknowledgement of the significance of affordable and efficient cross-border payment systems, said Sanjeev Agrawal, President of PHDCCI.
The remittance cost reduction can translate into increased trade and business efficiency, fostering overall economic growth by minimising cross-border payment expenses, as per Pushpank Kaushik, CEO of Jassper Shipping. “Cross-border payments and money transmission services, integral for remittances, serve as key touchpoints with the financial sector, facilitating broader access to financial services, promoting financial inclusion, and encouraging greater participation in financial services trade ultimately boosting the Indian economy.”
“While proposals at the WTO may take time to arrive at a consensus and then move towards implementation, India should meanwhile make it easier for individuals and businesses to make or receive cross-border payments on foreign websites. Recent Reserve Bank of India regulations have introduced stringent compliance requirements for payment aggregators of cross-border transactions, which makes it difficult for Indian businesses to receive payments from abroad,” Rahul Ahluwalia, Co-founder of Foundation for Economic Development opined.
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Business NewsEconomyWTO backs India’s proposal to cut remittance cost: Developing countries to benefit most; vantage for UPI, say economists
First Published:28 Feb 2024, 04:56 PM IST
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