Hello readers! You must have heard of the term NRI. Well, this blog will revolve around NRIs and their unsung contribution to India’s growth story.
NRI stands for Non-Resident Indian, and it refers to individuals who reside outside India but maintain strong connections with their motherland. These remarkable individuals play a crucial role in shaping India's growth and development.
As we delve into this topic, we'll uncover the profound impact that NRIs have made, from fostering economic development to sharing knowledge and expertise. We will help you witness the dedication and commitment of NRIs towards their homeland.
In this blog, we are specifically going to talk about the role NRIs play in India’s growth story. For that, let’s revisit the year 1991.
Liberalisation, 1991: The winds of change
In the year 1991, India became an ‘open economy’. The globalization and liberalization of the Indian economy created more opportunities for Indians to explore and work abroad. This led to an increase in the number of NRIs as borders became more open, allowing for easier migration and exchange of knowledge and resources. The global connections forged through these economic changes have contributed to the growth of NRIs and their impact on India.
With the liberalization of the Indian economy opening doors, let's now shift our focus to the remarkable contribution of NRIs, who have played a pivotal role in driving India's economic growth and prosperity. These contributions help enhance our economic stability and ability to meet international obligations.
1.Foreign Exhange
NRIs contribute to India through foreign exchange by bringing in valuable foreign currency through remittances, investments, and spending. This foreign exchange helps strengthen India's economy, stabilize the currency, and boost reserves. These reserves are essential for maintaining the stability of the Indian currency and funding various developmental projects in the country. NRIs can also hold bank accounts in India, such as Non-Resident External (NRE) or Non-Resident Ordinary (NRO) accounts. These deposits in foreign currency contribute to the country's foreign exchange reserves.
Let me elaborate with an example. When an NRI, let's say Rahul, sends money to his family in India as a remittance, he converts his foreign currency (assume, US dollars) into Indian rupees. This foreign exchange is then received by Rahul's family in India, contributing to India's foreign exchange reserves. Rahul's remittance not only supports his family but also has a positive impact on India's economy.
What would happen if India faced a shortage of foreign exchange? Has it happened in the past?
2.Balance of Payments
India has faced balance of payments crises in the past, such as in 1991 when it experienced a severe imbalance. The balance of payments refers to the record of all economic transactions between a country and the rest of the world over a specific period. It includes the trade balance (exports and imports of goods and services), financial transactions, and transfers.Factors like high fiscal deficit, increasing imports, and declining foreign exchange reserves led to a crisis.
To address this, India implemented economic reforms, liberalised trade policies, and attracted foreign investments. These measures helped stabilise the balance of payments and promote economic growth. During the balance of payments crisis in 1991, India also mortgaged a portion of its gold reserves. This was done to secure a loan from the International Monetary Fund (IMF) and address the foreign exchange shortage. The gold was used as collateral, providing temporary financial relief and helping stabilise the economy. Hence, NRIs play a significant role in maintaining a healthy balance of payments for India and contribute to its overall economic growth.
3.Tourism
When NRIs visit India, they bring in foreign currency, which contributes to the country's foreign exchange reserves. Their spending on accommodations, transportation, and local businesses further supports the economy. Additionally, they support various sectors such as hospitality and export industries. Moreover, they engage in cultural exchanges, promoting a deeper understanding and appreciation of Indian culture worldwide. This boosts the tourism sector and strengthens cultural ties.
4.Philanthropic activities
NRIs actively participate in philanthropy by supporting social causes and community development projects in India. Their contributions help improve education, healthcare, infrastructure, and other vital sectors. By giving back to their homeland, NRIs make a positive impact on society.
5.Knowledge transfer
NRIs bring valuable knowledge, skills, and global exposure to India. They often share their expertise through workshops, seminars, and collaborations with local communities. This knowledge transfer contributes to advancements in various fields, fostering growth and development.
6.FDI
NRIs invest in various sectors of the Indian economy, such as real estate, stocks, and businesses and startups. These investments also bring in foreign currency, which adds to the foreign exchange reserves.
The power of NRI repatriation in fueling India’s growth.
Repatriation refers to the process of sending money or assets back to one's home country. NRIs contribute to India's growth story through repatriation by sending remittances, which are the funds they transfer from their overseas earnings to India. These remittances play a significant role in India's economy, contributing to foreign exchange reserves, fueling investment opportunities, and boosting consumption. Repatriation of funds is governed by the Foreign Exchange Management Act, 1991 and guidelines provided by the Reserve Bank of India.
According to a report by the World Bank, remittances to India hit the record $100 billion mark in 2022. India's remittances also hit a record high of $89,127 million in FY21. These financial inflows support households, improve living standards, and help in various sectors like education, healthcare, and infrastructure development.
Graphical representation of World Bank data showing personal remittances for the previous 20 years.
Let’s explore how NRIs play a vital role in contributing to India’s economic stability and prosperity through repatriation.
1.Provide a lifeline for economic resilience
You may feel that the personal remittance by every individual NRI is a small value. However, when you view the bigger picture, this is a significant value and is strong enough to help nations in situations of financial distress.
As per a report by KNOMAD, World Bank group, “remittances stood at more than threefold above official development assistance and, excluding China, more than 50 percent higher than foreign direct investment, in the year 2021. This underscores the importance of remittance flows in smoothing consumption in recipient countries during periods of economic hardship.”
2.Boost Forex reserves
Remittances are a significant source of foreign exchange inflows and contribute to the expansion of the country's forex reserves. It increases people's purchasing power and affects how they consume, which ultimately causes a change in the market's demand and supply. Forex reserves help in financing imports and pay off external debt.
In FY23, India’s forex reserves once again surpassed the $600 billion mark after 2021. This includes the record remittance flows from NRIs that reached $107 billion in FY23.
3.Power India’s GDP growth
According to IMF, “remittance flows to low-income countries are nearly 6 percent of their gross domestic product (GDP), compared with about 2 percent of GDP for middle-income countries.” According to a Goldman Sachs report in 2023, India’s current account deficit (CAD) for 2023 may reduce to 1.4% of GDP, which is significantly lower than the 2.4% of GDP seen last year. This is considered a result of the expected net remittance flows of $104 billion in 2023. As per the report, “India was one of the highest recipients of remittances globally, with almost $110 billion in gross remittance receipts (3.2 per cent of GDP in 2022).”
A sizeable portion of India's GDP—nearly 3%—comes from remittances. They provide a much-needed safety net to recover from problems that arise in case of an increase in India’s trade deficit.
4.Ensure currency stability
Remittances play a vital role in stabilising the rupee and shielding it from market fluctuations. They contribute to India's foreign exchange reserves, which act as a buffer against currency volatility.
India’s global push for UPI to boost remittances.
UPI is the most convenient advancement in India’s financial industry. It is an acronym for Unified Payments Interface and has started to garner global attention. Bhutan became the first nation to allow UPI transactions using the BHIM UPI app in 2021, giving India's UPI a significant victory. Up until July 2023, UPI is being increasingly accepted by countries including France, Singapore, Saudi Arabia, Bahrain, UAE, Maldives, Bhutan, and Oman making it easier for Indians to make payments through UPI in these countries.
The global acceptance of UPI can lead to an increase in remittances by providing NRIs with a convenient, fast, and secure payment system. It allows NRIs to directly send money to India through UPI-enabled bank accounts overseas. This streamlines the remittance process and results in a higher volume of remittances. Since UPI transactions take place in rupee currency and do not require currency conversion, NRIs can save more on foreign exchange charges.
Investment options for NRIs
When NRIs invest in India, it provides a double benefit allowing them to actively participate in their homeland’s growth story by boosting capital inflow, creating job opportunities, and fostering innovation as well as diversify their portfolio, generate income and build wealth.
Let’s elaborate this further and take a glance at some investment options for NRIs in India.
1. Opening a bank account.
NRIs can consider opening the below-mentioned bank accounts to manage their finances in India.
NRE Account: A Non-Resident External (NRE) account is a rupee-denominated account that allows NRIs to hold and manage their foreign income in India.
NRO Account: ANon-Resident Ordinary (NRO) account is also a rupee-denominated account, but it is meant for NRIs to manage their income earned in India, such as rent, dividends, or pension.
FCNR Account: Foreign Currency Non-resident (FCNR) Account allows NRIs to maintain a fixed deposit in their foreign currency.
For detailed differentiation between these three accounts, you can refer to the Reserve Bank of India’s official website.
2. Fixed Deposits (FDs)
Like the above-mentioned accounts, NRIs can open NRE, NRO, and FCNR fixed deposits. They can earn tax-free interest on NRE and FCNR FDs. However, the interest earned on NRO FDs is taxable in India. These fixed deposits allow NRIs to save and earn returns on their investments.
3.Mutual Funds
NRIs can invest in Indian mutual funds, which offer diversified portfolios and professional fund management. These funds provide opportunities for capital appreciation and income generation. A foreign investment law in India forbids NRIs from the United States of America (USA) and Canada to invest in all mutual fund schemes in India.
4. Real Estate
Investing in Indian real estate can be another option for NRIs. They can purchase residential or commercial properties and benefit from potential price appreciation and rental income. The laws for investment by NRIs in India are governed by the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India (RBI) regulations, and prohibit ownership of plantation homes, farmhouses, and agricultural property by NRIs. However, they can inherit such properties from Indian residents.
5. Government Securities
NRIs can also invest in government securities, such as National Savings Certificates (NSCs), Treasury Bills (T-Bills), and Government Bonds. These investments provide fixed returns and are considered safe. NRIs can invest in government securities through a separate route i.e. the 'Fully Accessible Route' introduced by the RBI. NRI investors can invest in specified government securities without being subject to any investment ceilings, through this route.
6. Equity Market
NRIs can participate in the Indian stock market by investing in stocks and equity-related instruments. They can do this through the Portfolio Investment Scheme (PIS) with a designated bank. Additionally, NRIs are barred from investing in instruments such as currency derivatives segment of exchange and commodities.
Apart from these, NRIs cannot participate in intraday trading in equity, ‘buy today, sell tomorrow’ (BTST) trading, ‘Sell today, Buy tomorrow’ (STBT) trading or short selling in the Indian stock markets, unlike resident Indians. They are only allowed to take the delivery of shares.
For more information related to restrictions on NRI trading, refer to:
7. Public Provident Fund (PPF)
If NRIs already have a PPF account before becoming an NRI, can continue to contribute to their PPF account until maturity. However, they are not eligible to open a new PPF account.
8.Initial Public Offerings (IPO)
NRIs can participate in initial public offerings (IPOs) of Indian companies. It allows them to invest in newly listed companies and potentially benefit from their growth. NRIs can invest in initial public offering (IPO) in India only through a Non-PIS NRE or NRO savings account.
9. Startups
NRIs can invest in the Indian startup ecosystem, either directly or through venture capital funds. It supports innovation and entrepreneurship in India.
Remember, it's essential for NRIs to comply with the regulations and guidelines set by the Reserve Bank of India (RBI) and other relevant authorities while investing in India. It is recommended to consult with a financial advisor to explore the best investment options based on individual goals and risk appetite.
Final thoughts
NRIs play a pivotal role in India's growth story through their multifaceted contributions. Their financial support in the form of remittances, investments, and foreign exchange bolster the economy. But their impact goes beyond numbers. NRIs bring with them a wealth of knowledge and expertise, fostering innovation and technology transfer. Their cultural exchange enriches our society, nurturing diversity and understanding. From reviving heritage to supporting social causes, NRIs leave an indelible mark on India's progress. Let's celebrate the incredible contributions of NRIs in shaping India's growth narrative.