The Hindu Business Line : Unclog the money channels

One of the silent and `invisible' participants in India's economic success story has been the overseas worker and professional sending his or her earnings back home. So much so that inward remittances have become an important tool in stabilising the country's balance of payments. Though private transfers to India surged with the first oil boom in West Asia in the 1970s, only in the last decade did repatriation of funds become an important indicator of the country's external sector, the volumes surging from $2.1 billion in 1990 to $24 billion in 2005. As a result remittances have become an important means for bridging India's merchandise trade deficit. Transfers also account for an increasing share in GDP; from 0.1 per cent in 1990 to 3 per cent in 2005-06.

Such a sustained growth in private transfers has taken India to the top of the remittances table; the country accounts for nearly 25 per cent of remittances world-wide. But India's record inflow is of a piece with transfers to South Asia that are outpacing traditional exports as forex earners, according to the World Bank's Global Economic Prospects for 2006. Two sets of factors account for this surge in India's invisible earnings: Over the years there has been a shift from semi-skilled labour, mostly bound for West Asia, to highly skilled professionals seeking jobs in the developed world. The second set of factors has been the current account convertibility, market-based exchange rate that has encouraged the inflow of earnings through official channels, and changes in the banking system to route the earnings cost-effectively and quickly.

But these are not enough; one of the main shortcomings is the high cost of small-value remittances and a working group set up by the Reserve Bank of India, with representation from private forex dealers and banks, has suggested a few crucial changes in remittance pricing and related issues. Among other things, the group has suggested that banks not merely review current charges at the foreign and domestic ends but also upgrade their infrastructure for managing large transactions. Banks would do well to review their technology also in anticipation of the freer float of the rupee. One of the main deterrents to the free transfer of overseas funds is not so much the cost as the cumbersome channels; so getting banks to tie up with more correspondent banks, as the group suggests, would make remittance that much easier and attractive.

While improvements in remittance pricing and procedures will result in more inflows through official channels, one area where policymakers have not quite succeeded is in turning those inflows into productive investments. Most transfers find their way into consumption, an aspect that makes India's grand success seem hollow when compared with China where overseas Chinese fuelled that country's takeoff into its high growth path. For India, desperately seeking funds for infrastructure, that is a sad story indeed.