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US anti-terror law helps to line India's
coffers
By Indrajit Basu
KOLKATA - The US-led "war on terrorism" and its
financiers are giving India's economy a direct boost,
with hordes of non-resident Indians (NRIs) and foreign
citizens of Indian origin increasingly turning to legal
channels to remit money back home.
The USA
Patriot (Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct
Terrorism) Act of 2001, passed by the United States in
the aftermath of the September 11, 2001, terrorist
attacks, requires that all transfers of funds out of the
US for fees register with the US government. Now, the US
is cracking down on those who bypass this registration,
which is good news for global money-transfer and
financial-service companies in India who say the act is
forcing Indians abroad to avoid the unregulated
hawala route for sending money home.
"Most of our customers are those who used the
hawala channel. We are now eating into that
clientele," said V K Soni, who runs a Western Union - a
US-based world leader in global money transfers - outlet
in Mumbai.
Indians working abroad long have used
the unregulated hawala channel - an informal
fund-transfer system operated by moneychangers - to send
part of their money back home to relatives. It is an
attractive option because hawala operators offer
a premium - ranging from 5-7 percent - on the official
conversion rate.
Since September 11, the US has
led a worldwide crackdown on unregulated hawalas,
which have been identified as the main instrument used
by terrorists to move money surreptitiously. The result:
expatriate Indians are using more conventional means to
send money home, facilitating the Indian government's
ability to track, and therefore tax, inbound funds, as
well as divert such remittances into state coffers.
Indeed, remittances from expatriate Indians is a
significant source of foreign-exchange reserves (and tax
revenues) for the country. However, owing to the
ubiquitous hawala system, which is also deeply
rooted in tradition, a major portion of such remittances
does not actually add to the state's coffers. For
instance, according to Chief Postmaster General K
Noorjehan, less than one-third of funds remitted to
India by NRIs every year goes through the legal channel.
"According to a study, over 20 million Indians globally
remit an estimated US$14 billion every year, and of that
only $4 billion are sent through the legal channels,"
Noorjehan said. The Indian Postal Department has a
tie-up with Western Union.
Remittances, or money
sent home by emigrant Indians, are pushing India to the
top slot among all developing countries, accounting for
about five times the country's foreign direct
investments (FDI) per year. They are also 40 percent
more than India's famed software earnings.
Over
the past decade, remittances worldwide have risen 44
percent, reaching an estimated $138 billion last year,
and are projected to grow by an additional 28 percent
over the next three years, says a Nilson Report - a
US-based news and proprietary research outfit that
tracks payment services in the United States, which is
the biggest source of remittances, followed by Saudi
Arabia. The rush of figures, in fact, buttresses the
fact that remittances are getting to be the
second-largest source, after FDI, of external finance in
poor countries.
As expat Indians shift to the
legal means of moving money, grinning from pocket to
pocket are global money-transfer firms that are
registered with the United States. The global leader,
Western Union, has already declared that India is among
the two top markets in Asia. The company will not only
expand its network of agents in India, but will also
introduce new products and services, says president
William D Thomas. "We started the money-transfer
business in India just three years ago and now it has
grown to become the top market for us after China,"
Thomas said recently, addressing a road show in London
for that country's NRIs. "We are now going to introduce
new products and services to provide real value to our
customers and also expand our agent-location network so
that we are close to our customers' homes."
In
terms of growth, the Indian market is also the fastest.
"The business is growing significantly, and we will be
expanding to 14,000 locations in 1,500 cities [in India]
by the end of this year," Thomas said, adding that the
company also has tie-ups with 4,500 post offices and
regional government banks. The bulk of its customers in
the United States, the United Kingdom and the Middle
East - the three principal markets - are blue-collar
workers whose families and relatives have no access to
the Internet in India, Western Union said.
Others that are also raking in business from
this new opportunity are US-based MoneyGram and
Citibank, UK-based First Remit, and local outfits such
as Timesofmoney.com. "In order to increase the options
of legalized remittance, we have developed a service to
enable a number of banks in India to offer legalized
remittance service in the form of bank-to-bank
transfer," said a Timesofmoney.com spokesperson.
Incidentally, two other countries that are
deriving similar benefits from the the Patriotic Act are
neighboring Bangladesh and Pakistan, which global
money-transfer outfits are also focusing on.
India's federal bank, the Reserve Bank of India
(RBI), expects a step-jump on remittances through
legitimate means as the crackdown continues - given that
many unregulated hawala operators remain in
business. "After all, there is still a fair amount of
gray remittances that have to be brought into the net,"
said an RBI spokesperson.
Some experts, however,
doubt that Western Union and its ilk will be able to
make much of a dent in the established businesses of
hawala operators. "[A] majority of the NRI
remitters are typically from middle-income groups to
whom a 5-7 percent higher rate on the official
conversion rates are too attractive to ignore," said a
Kolkata-based hawala operator. Moreover the speed
and convenience of such money transfers comes with a
cost - going up to $60 for sending $1,000 from the US -
whereas banks that offer cheaper rates take anywhere
from 21-30 days.
Nevertheless, the RBI feels
that every little share that the legal money-transfer
system takes away from the hawala operators helps
- at least on the margins - the Indian economy, slated
to grow about 7 percent. Remittances through legal
routes that flow directly into the RBI coffers aid in
boosting the country's forex ratings as well as help in
keeping the government's fiscal deficit in check -
somewhat.
(Copyright 2003 Asia Times Online Ltd.
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