India is the largest remittances receiving country in the world. Indian citizens working in other countries send money back to the relatives in India. This remittances is the second largest item in the country’s invisible account. We should know that remittance is a form of transfer.
Now what are remittances and how they are treated in the balance of payment account? To understand this, we have to know the meaning of exchange and transfer also.
Exchange and transfer
Every transaction is either an exchange or a transfer. An exchange involves a provision of something of economic value in return for a corresponding item of economic value.
In the case of transfer, there will not be any corresponding return of an item of economic value. According to the IMF “A transfer is an entry that corresponds to the provision of a good, service, financial asset, or other non-produced asset by an institutional unit to another institutional unit when there is no corresponding return of an item of economic value.” The IMF’s classification of institutional unit includes households and individuals (Refer P. 52 of Balance of Payments and International Investment Position Manual, 2009, IMF).
We may have heard enough about cash transfer from topics related to subsidies. A cash transfer consists of the payment of currency or transferable deposit by one institutional unit to another without anything supplied in return.
A transfer in kind consists of either the transfer of ownership of a good or asset, other than cash, or the provision of a service, again without any corresponding return of an item of economic value.
An important form of transfer is remittance. According to the IMF, “Remittances represent household income from foreign economies arising mainly from the temporary or permanent movement of people to those economies.” Remittances may have a significant impact on poverty reduction and can finance economic growth in receiving economies. Remittances are mainly derived from two items in the balance of payments framework: income earned by workers in economies where they are not resident (or from non-resident employers) and transfers from residents of one economy to residents of another.