A remittance is a monetary payment that is made to another party. In general, any payment of an invoice or bill is referred to as a remittance. However, the term is most commonly used nowadays to refer to a sum of money sent from a person working abroad to his or her family back home. Remittance is an important topic for the UPSC IAS Exam Economy Syllabus.

What are Remittances?

• The term comes from the word remit, which means to send something back.
• A remittance is a money sent to another party, typically in another country.
• Typically, the sender is a foreign worker, and the recipient is a relative back home.
• Remittances are one of the most important sources of income for people in low-income and developing countries, frequently outpacing direct investment and international development assistance.
• According to the World Bank, India received USD 87 billion in remittances in the year 2021.

Types of Remittances

The RBI has segregated remittances into two main types:

Inward Remittances

• Inward remittances are funds transferred from abroad to India.
• These transfers are typical of a personal nature and are sent to support a family.
• For example, if you are an NRI in the United States and send money to your parents in India, this is considered an inward remittance.
• In most cases, remittances are sent through a bank, money transfer agents, or, more recently, online money transfer specialists.
• Sending money to India is simple, quick, and painless if you do it online through a reputable money transfer service provider.

Outward Remittances

• Outward remittances are funds transferred from India to countries outside of India.
• Sending money from India to your children studying in the United States is an example of an outward remittance.
• Indian individuals can transfer up to USD 2,50,000 per fiscal year under the Liberalised Remittance Scheme (LRS).
• The industry of outward remittances is not as competitive as the industry of inward remittances.
• However, there are now a few online money transfer companies that offer money transfer services from India to the United States at a faster and cheaper rate than traditional methods of sending money.

Mode of Remittances

There are several methods for sending money to India:

• Check
• Demand drafts
• Money transfer agents
• Banks
• Wise transfers
• Online money transfer specialists
• Digital Wallets

Significance of Remittances

Individual and Family Advantages

• Foreign remittances to Indian residents have lifted many people out of poverty and provided a safety net for families during difficult times. Many households rely on remittances for food.
• Furthermore, remittances help to fund education, quality medical care, and entrepreneurship for friends and families.

Advantages to the Indian economy

• The inflow of remittances into India has been the backbone of the Indian economy. Remittances are an important source of funding for India's trade deficit.
• Furthermore, it is an excellent source of foreign exchange.
• It promotes consumption in India, reducing poverty, improving access to healthcare and education, promoting a healthier lifestyle, increasing financial literacy, asset accumulation, and so on.
• Remittances are critical to the development of Indian states, particularly during times of crisis.
• They also play a significant role in disaster relief. They contribute to raising the standard of living in low-income countries and combating global poverty.
• Remittances are also used to assist people in less developed countries in opening bank accounts, a trend that promotes economic development.

Issues with Remittances

• There is legitimate concern about the high cost of global remittances, especially given the increased push for global financial inclusion.
• Some countries limit remittances to bank wires to promote transparency, but banks are the most expensive transfer channel, and wires are particularly expensive, according to the World Bank.
• Financial intelligence units are concerned that remittances are one way for money to be laundered or for violent activities like terrorism to be sponsored.
• The methodology used by countries to record the amount of money received through remittances is rarely made public. While the majority of value transfers take place via web or wire, where they can be easily tracked, a significant amount of money is transferred in less transparent ways.
• Fees for international money transfers are being reduced as a result of recent fintech waves. Payoneer, Wise, and Worldremit are among the newcomers. Western Union's tools are being updated. To ensure safer financial inclusion, more regulation and oversight are needed.

Conclusion

Remittances are becoming increasingly important in the economies of small and developing countries. India is the top recipient of remittances worldwide. The Indian government has also established policy frameworks to make it easier, less expensive, and faster. If the Indian diaspora responds positively to these incentives, we can expect a surge in remittances to India in the coming years.