It Helps The Country’s GDP Growth When You Remits Money From Abroad To Home Country.

remittance helps in GDP growth

Working abroad is very much popular and people working abroad have a different status in society. There are so many people in India aspire to go abroad to work as moving to a new country can open up career opportunities that you may not have thought of. Try to be aware of the industry climate in the country and look for chances to progress.

Working abroad is much desirable as it offers good career growth and money. There are so many factors out there which encourages people to look for opportunities in a foreign country. Most of the people working abroad send money to origin country to support their families. When the foreign workers send money from sponsor country to the home country, is called remittance.

There has been a lot of discussion about foreign money’s contribution to India’s GDP growth. I always wonder, how sending money from foreign to India, really helps India in its growth and good GDP number.

Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries. Workers’ remittances are a significant part of international capital flows, especially with regard to labor-exporting countries like India, Srilanka, Pakistan, Philipines, Bangladesh, etc.

According to the World Bank, in 2018 overall global remittance grew 10% to US$689 billion, including US$528 billion to developing countries. Overall global remittance is expected to grow 3.7% to US$ 715 billion in 2019, including US$549 billion to developing nations.

Due to its large diaspora and overseas expats population, India consecutively remains the top receiver of remittance, e.g. with US$80 billion in 2018, US$65.3 billion (2.7% of India’s GDP) in 2017, US$ 62.7 billion in 2016 and US$70 billion in 2014, Other top recipients in 2018 were US$67 billion to China, US$34 billion each to Philippines and Mexico, US$26 billion to Egypt.

Before we discuss, how remittance can boost the country’s growth and GDP, let’s get familiar with the Gross Domestic Product (GDP). It will help to understand the article as this terminology will be used throughout the article.

What is GDP?

The gross domestic product (GDP) is one of the primary indicators used to measure (monetary) the health of a country’s economy and to one of the ways to measure, how fast the economy is growing. It represents the total dollar value of all goods and services produced over a specific time period, often referred to as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. It is measured as the percentage rate change in the real gross domestic product (GDP). For example, if the Q3 2018 GDP of a country is up 3%, the economy of that country has grown by 3% over the third quarter. While quarterly growth rates are a periodic measure of how the economy is faring, annual GDP figures are often considered the benchmark for the size of the economy.

How GDP is Calculated?

Below formula used to calculate the GDP.

GDP = C + I + G + (Ex – Im)

C = Total spending by consumers
I = Total investment (spending on goods and services) by businesses
G = Total spending by government
(Ex – Im) = Net exports (exports-imports)

So GDP will increase when the above 4 factors will increase:

  • C increases when people spend more on goods & services
  • I increase when investors invest in Indian projects like roads, railways & nuclear power plants through FDI or FII.
  • G increases when govt pumps more money in the economy through subsidies or welfare schemes.
  • Net export increases when India exports more than it imports.

In General, consumer spending & Investment are the main contributors to GDP in India.

So, How does remittance affecting GDP and Country growth?

From a macroeconomic perspective, there is no conclusive relationship between remittances and GDP growth. While remittances can boost aggregate demand and thereby spur economic activity, other research indicates that remittances may also have adverse macroeconomic impacts by increasing income inequality and reducing labor supply among recipient countries.

When the people in a country send money to another country, the money has to return to the country of origin. That’s the only place where it’s legal tender, and can be spent.

When 100 USD is remitted to India from the USA,  the receiving bank’s account in the USA is credited with 100 USD and it provides equivalent Indian Rupees to its customer. It results in a reduction in spending power in the United States by $100 and increased spending power in INDIA by $100.

Following are major benefits of remittance which directly links to the country GDP growth.

Increases Spending Power:

As explained in GDP calculation, people’s spending power is the key element in GDP. When people earning abroad send money to family, it helps them to spend more in the home country which in return creates more demand for goods in the market.

Increased Employment Rate:

Country’s GDP growth highly depend on employment growth. Increased product demand, again boost the companies to produce more which requires more workers. Higher production leads to a lower unemployment rate, further fueling demand. Increased wages lead to higher demand as consumers spend more freely. This leads to higher GDP combined with inflation.

Reduced Poverty:

Remittances are believed to reduce poverty, As the poor who migrate to the foreign country and send back remittances to the family member. It helps to reduce poverty by fulfilling the basic needs and also giving a better life.

Helpful during emergency and disaster:

During disasters or emergencies, remittances can be a vital source of income for people whose other forms of livelihood may have been destroyed by conflict or natural disaster.

Remittances are playing a vital role in the economies of many countries. They contribute to economic growth and to the livelihoods of those countries. For many developing nations, remittances received to make up a significant portion of their economies often receiving over 10% of their GDP in remittances each year. Some countries, such as Tajikistan, receive over half of their national GDP in remittances.

Remittances to India are money transfers from non-resident Indians (NRIs) employed outside the country to family, friends or relatives residing in India. Remittances to India stood at US$80 billion in 2018, accounting for over 2.8% of the country’s GDP.

I hope this article helps to clear some facts. Feel free to share your feedback in the comment section of this article. Thank you for reading and God bless you all.

Latest Comments

  1. Sujit Soman 14th April 2019
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