An unexpected bonanza from NRIs

Despite substantial GDP growth in the last two decades, India remains a poor country that ranks far behind others in almost every parameter. But there is one respect in which India is world number one: remittances from the overseas Diaspora. India heads this table, followed by Mexico, Philippines, Egypt and Turkey. What the RBI calls \”private transfers\” from overseas Indians rose from $ 2.8 billion in 1990-91 to a whopping $ 23.18 billion in 2003-04. This is larger than the GDP of some small countries. Note that FDI in 2003-04 was only $ 4.7 billion and gross external assistance only $3.3 billion. So, private transfers were almost thrice as large as FDI and gross aid put together.

What accounts for this phenomenal surge? Remittances have been rising to many countries including India, and will doubtless continue increasing. But inflows to India have not risen gradually, they have risen by leaps and bounds. They almost doubled in the three years fropm 2000-01 to 2003-04 (see attached table). Why?

Part of the reason—as becomes clear from a detailed study of invisibles in the March issue of the RBI Bulletin—is semantic. The RBI typically gives a single, omnibus figure for private transfers without breaking this up into components. So, when most observers (including politicians, economists and the media) talk of remittances, they tend to quote the RBI data on private transfers. Most people think remittances and private transfers are much the same thing.

In fact this is not the case, as the accompanying table shows. Private transfers have four components: (a) inward remittances from overseas Indians; (b) local withdrawals of NRI bank deposits and redemption of NRI bonds; (c) gold and silver in personal baggage; and (d) donations to religious and charitable organizations.

Many people will be surprised by the enormous size of local withdrawals/redemptions. These can dwarf remittances from abroad. Local withdrawals/redemptions totaled $ 11.7 billion in 2003-04, higher than remittances of $ 10.8 billion. There was a special reason for this: the Resurgent India Bonds, issued to NRIs in 1998, were redeemed in 2003-04, and much of the redeemed money was converted to Indian rupees instead of being repatriated in dollars. This accounted for the big bulge. A similar bulge can be expected when the Millenium Bonds, issued in 2000, are redeemed in late 2005.

In 2004-05, private transfers appear to have been of roughly the same order as in 2003-04 although no bonds were redeemed that year. So, there is a strong upward trend in withdrawals from NRI deposits. Note that in 2001-02, before any bond redemption, withdrawals from NRI deposits exceeded remittances from overseas.

Here, then, is one of the key answers to the mystery of skyrocketing remittances. What has widely been called a massive surge of remittances is largely a massive withdrawal surge. Private transfers increased 78% from $ 13,065 million in 2000-01 to $ 23,183 million in 2003-04. But remittances in these three years rose by a more modest 40%, from $ 7,747 million to $ 10,798. Deposit withdrawals and bond redemptions provided the big bulge.

NRI deposits have risen substantially in the 1990s, from $ 13,721 million in March 1990 to $ 33,266 million in March 2004. This may seem substantial, but it very modest compared with the growth of private transfers. NRI deposits increased by $ 20 billion in 14 years between 1990 and 2004. This 14-year increment was less than private transfers in a single year, 2003-04 !

I have not been able to locate data on exactly what proportion of the Resurgent India Bonds were retained in India in 2003-04. But an indication is available in the huge upward revision of private transfers by the RBI after the end of the fiscal year. The RBI initially gave a provisional figure of $ 19,235 million for remittances, but later revised this to $ 23,183 after taking into account local redemption of RIBs. Thus suggests that of the RIB redemption value of $ 5.2 billion, roughly $ 4 billion may have been converted to rupees.

Table 2. Private transfers on the invisibles account ($ million)

Source:  India’s Invisibles, RBI Bulletin, March 2005

What accounts for such large scale conversion? There appear to be at least four reasons.

1.Skilled temporary migrants often come from relatively well-off families and may not need to send home money for immediate consumption. Such skilled migrants may prefer to send home money in the form of NRI deposits, and then use these for consumption after returning home. The sharp rise in migration of professionals in the 1990s could be one reason why withdrawals have risen so substantially.

2. Back in the 1980s, currency controls were stiff, so NRIs preferred to keep money in repatriable deposits. But liberalisation and economic success in the 1990s has led to confidence in India\’s future and the gradual relaxation of foreign exchange controls, to the point where returnee NRIs and Indians planning to go abroad in future are confident that they can get dollars easily when required. This has reduced the high value once placed on repatriable NRI deposits, and encouraged withdrawal for local use.

3. The rupee depreciated steadily against the dollar in earlier decades. So, NRI deposits once held the prospect of currency gains, even if interest rates were modest. Not any more, though. The rupee has started appreciating against the dollar, and the Goldman Sachs BRIC report estimates that the rupee will rise 2.5% against the dollar annually till 2050.

4. The government has progressively reduced the red tape involved in NRI investment in real estate and stock markets, though procedural hurdles remain. Indian stock markets and real estate markets have boomed in recent years. So NRIs are perhaps switching from bank deposits to investment in Indian real estate and stocks.

All these look like trends that will be sustained. That is good news indeed.