Indian “Remittance” – Change it to FDI

M.R. Raghu
Tuesday, June 2, 2015

India tops the league table when measured in terms of net inflow of remittance even outsmarting China though India’s diaspora is only half that of China. As per IMF data, India received a net flow of nearly $63 billion in 2014 while China received $61 billion. India’s net flow accounts for 3.1% of its GDP while for China it is 0.6%.

How come India enjoys such a large diaspora strength and have they done enough to smart that crowd in terms of a better engagement model?

The 24 million diaspora population is mostly concentrated in Asia (11m), Americas (5 m), Middle East (4.2), Africa (2.8m), Europe (1.8m) and Oceania (1 m) in that order. Together they remit $63 billion with contributions from Middle East (37 b), Americas (14b), Asia (10b), Europe (5b), Oceania (2b) & Africa (0.3 b). The highlight of this structure is clearly Middle East that accounts for 17.5% of Indian diaspora population, but account for nearly 60% of total remittance.

On the other hand, the Chinese diaspora is twice that of India at 50 million mostly concentrated in Asia (27m), Americas (8m), Europe (2.3m), Oceania (1.1m) and Africa (1m) with insignificant presence in the Middle East. The $61 billion net inflow of remittance to China comes predominantly from Asia (32b), Americas (21b) with the rest having minor contributions.

The connect to Asia for both China and India can be explained due to ethnic, historical and geographic reasons. While for China, Asia link will continue to be important and growing, for India Middle East and Americas will count as sweet spots. It is interesting to note that while Indian diaspora strength is more or less equivalent in both Middle East and Americas, Middle East remittance are nearly 3 times that of Americas.

GDP Source: IMF World Economic Outlook Database

The Indian diaspora in the Middle East is primarily comprised of low-wage earners who mostly live alone with a need to support families back home. Also, most of the Middle Eastern countries have tough labor laws which avoids providing citizenship even after long periods of stay. This invariably reduces spending options and forces remittances back home. In other words, the “engagement quotient” with the local economy is lower from investment (equity, real estate etc.) and consumerism (tourism, education etc.) point of view. Absence of tax also increases the savings and therefore remittance.

On the other hand, the Americas Indian diaspora is different in character. Though they are larger than the Middle East Indian diaspora, they account for only a third of Middle East remittance. This is due to larger “engagement quotient” in Americas than in the Middle East. Non-resident Indians that migrate to US and Canada have deeper roots in terms of local investments and eventually become citizens of those countries. They also come under the tax ambit and receive social security benefits in return. All these increases the engagement quotient and reduces the remittance pot from Americas.

Compared to China, India has wooed its diaspora relatively milder. There is an important lesson to be learnt from China. China has wooed its Non-resident Chinese to come and invest in China rather than just send remittance. They enabled the process through forming a special cabinet ministry, establishing Overseas Chinese Affairs Commission (OCAC), All-China Federation of Returned Overseas Chinese (ACFROC), establishing special economic zones, passing preferential laws, etc. All these encouraged overseas Chinese to actively “invest” in the Chinese economy rather than just “remit”.

India’s red tape, and bureaucracy still acts as a strong deterrent to the diaspora if they were to invest in the country. While patriotic and cultural sentiments will continue to run high among Indians, the decision to come back and contribute to the growth of the country is rooted in much larger reforms and attitudinal change towards non-resident Indians. Merely giving them tax free status will not be enough to encourage this group to do more for India.

M. R. Raghu, CFA, FRM is the Head of the Research Unit and Senior Vice President at Kuwait Financial Centre MARKAZ.
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