Impact of Remittances: How Does Remittance Impact an Economy?

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Key Takeaways

An increase in international migration has boosted the flow of remittances across the world in the last couple of decades. Money sent by foreign workers to their homes not just becomes an important source of income for their families, but also contributes significantly to the receiving country’s economy. Here’s a detailed look at the overall impact of remittances, especially on developing economies like India.

Introduction

Derived from the word ‘remit’ (which means to send back), remittance⁽¹⁾ essentially refers to the money sent by an individual residing overseas to his/her home country. Any money sent from abroad to family members, friends, acquaintances or any other third party is considered as a remittance. In today’s times, remittances have become one of the largest sources of income for poorer nations. Money sent from overseas citizens is seen as a key source of external funding by these countries. Despite its many benefits, concerns persist about the economic and social implications of remittances. Effects of remittances in developing countries vary widely depending on the structure and size of the economies, local policies, and how the money is spent by the recipient households.

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How does remittance impact the Indian economy?

The importance of remittances for the Indian economy can be gauged by the fact that India has been among the top 10 remittance recipient countries in the world since the 1970s. According to a report by the World Bank⁽⁴⁾, the Indian diaspora sent a whopping $79 billion back home in 2018, making India the world’s top recipient of remittances that year. The sheer size of these remittances is bound to have a significant impact on the economy of the country – both at the micro and the macro level.

How can remittance positively impact an economy?

There are different ways and levels at which remittances can impact an economy. The following are the most significant ones.

At the micro-level, remittances boost a family’s income, which leads to improved nutritional outcomes, higher spending on education, increased purchasing power, more disposable incomes, and a better standard of living.
Remittances also enable recipients to boost their investments, savings and financial literacy as a stable stream of overseas income can ease credit constraints of unbanked households.
From a macro perspective, remittances increase consumption in the economy as the disposable income of families increases. This helps in pushing up the GDP growth.
Remittances also keep the foreign reserves of India stable, thereby helping the Indian rupee hold up against the US dollar and other major currencies.
Remittances can further act as insurance at a time when the country faces macroeconomic shocks; natural disasters (floods, earthquakes), financial crises, political upheaval, for instance. As it has been observed countless times, NRIs have relieved on remittance to lend financial support to their motherland, while she deals with many a crisis.

The many ways in which remittances can offset an economy

While remittances typically have a largely positive impact on the economy, there are also some repercussions we have to brace for. They are as under:

Remittances can undermine the incentives for recipients to work. This can create a culture of dependency and can lead to lower labour force participation in an economy. The effect of remittances on economic growth⁽²⁾ in such situations can be adverse.
Remittances can have a counter-productive impact⁽³⁾ on a family’s consumption pattern as well. Unnecessary expenditures, indulgence in luxury goods, bad investments etc., are some classic examples of a bad remittance effect on the economy.
In India and most other overseas countries, remittances are also feared to be one of the ways in which foreign money can be laundered for illegal and unethical activities, with terrorism being a major concern etc.

Final note

Remittances largely lead to increase cash flow in India, thereby resulting in an increased purchasing power among the population. Foreign remittances from NRIs during crises situations also impact the economy positively. Remittances assist with economic growth and poverty reduction in developing economies but like everything else, it has its limitations too. As such, the Indian government is faced with the challenge of framing policies in such a way that not just promote remittance flows but also encourage their proper use.

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