Sudip Bandyopadhyay

As a recent World Bank report makes clear, hard times accentuate the importance of kith and kin. Nowhere is this more true than in developing countries, where automatic stabilisers are weak and vulnerability is high. Support from friends and family abroad is more constant than fragile states and footloose businesses.  In the boom years, development finance was chiefly about foreign investment and foreign aid. In 2007 capital flows to developing countries amounted to $1,200bn. That source of money is now drying up. Over the next  year capital flows to developing countries are expec­t­ed to collapse, from $707bn to $363bn.

While foreign investment is in free-fall, remittances – money sent from developed world migrants to relatives in the developing world – are expected to remain relatively stable. The World Bank predicts a seven percent fall  in 2009, followed by a modest 3 per cent rise the year after. By 2010 remittances will broadly equal net private capital flows to developing countries.  In the short term, the main risks to remittance flows are a significant worsening of the global economy and exchange rate depreciation in countries with sizeable remitting populations. Any further collapse of the Russian rouble, for example, would have big knock-on effects in central Asia.

Stability of remittance flows is important. While the biggest aggregate recipients are India, China and Mexico, the countries most reliant on remittances tend to be poorer and more unstable: Honduras, Lebanon, Tajikistan.  In the longer term, the outlook for remittances is mixed. A simple continuation of past growth is unlikely. Economic uncertainty in the developed world has already provoked ugly populist demands for a severe tightening of immigration policy. Meanwhile, ties between older migrants and their relatives in the developing world may weaken over time.

The role of remittances, both in stabilising consumption in the developing world and in preventing recession from widening global instability, has begun to be recognised. While earlier Group of Eight gatherings underlined the risk of remittances being used as cover for terrorist financing, the L’Aquila  summit reiterated the aim of making them easier and cheaper. Leaders set the objective of halving administrative costs from 10 to 5 per cent in five years. Wiring money home may not rank with fiscal stimulus for drama but, taken together, remittances are a crucial link in the global economy.

Inward person to person remittance through private sector players (like Western Union, Moneygram, etc) is permitted in India by RBI, outward remittance through the same channel is not allowed.  While there was merit  in not allowing the same upto a point of time, with the gradual opening up of the economy, the rationale for the same looks weak.  Similarly remittance within the country continues to remain in the exclusive domain of banks and post offices.  Considering the fact that only one third  of the population have bank accounts, permitting person to person remittance through private established channels (like Western Union, Moneygram, etc) can significantly facilitate financial inclusion  and legitimise huge ongoing domestic money movement.   Payment and Settlement Regulation 2007 envisages opening up of this sector in a caliberated manner by the RBI over the next few years.

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