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Demonetization in India: Short and long term impact on remittances.

Supriyo De's picture
In observance of the International Migrants Day, Dec 18

The Indian government issued orders withdrawing the validity of existing high denomination (Rs. 500 and Rs. 1000) currency notes on 8th November 2016. Newer currency notes (Rs. 500 and Rs. 2000) were issued subsequently. The move was aimed at tackling counterfeit currency notes and those hoarding untaxed or illicit income. The impact on formal international inward remittances was minimal.  MTOs doing cash payouts were impacted in the short run due to unavailability of large denomination currency. Families of migrants also reported problems in withdrawing remittances from ATMs. Formal international outflows were not affected since these are usually made out of bank accounts.
 
Informal flows both domestic and international were hit much harder. Hawala operators were stuck with old currency they could not readily convert to new currency. Furthermore, they were targeted by tax authorities as they tried to facilitate conversion of stored untaxed or illegal money into gold or foreign exchange for a premium. Authorities enforcing foreign exchange laws also raided forex dealers making back dated accounting entries to convert the old currency into foreign currency. For non-residents Indians, the Reserve Bank of India allowed depositing the currency in their non-resident ordinary accounts (which are intended for Indian source deposits). Reports indicate that the move created difficulties for low skilled internal migrants who lacked sufficient documentation to convert their cash wages and savings into the new currency. It is likely that informal sector workers from Nepal and Bangladesh also faced similar challenges resulting in lower informal remittances to those countries.
 
The longer run impact on formal domestic remittances could be significant. Following up on a major financial inclusion initiative (Jan Dhan Yojana) and new payments banks, this move is likely to drive a large segment of domestic remittances into formal channels. Estimates suggest that 70 percent of Indian domestic remittances were made through informal channels. The use of payment banks, digital channels and mobile money is likely to increase. Payment banks and digital payment companies are gearing up to use the opportunity to tap India’s vast rural market. The government also announced incentives for encouraging non-cash transactions. These included waiver of service tax on card transactions and discounts on railway ticket purchased through digital modes. It has also set up a committee to encourage digital payments. If these moves by the private sector and government are successful, the scaling up of digital and mobile remittance channels could bring down remittance costs, especially for domestic remittances.