Kautilya: Woo Brains Not only Bucks

India Today
November 9, 1998

KAUTILYA
Woo Brains Not Only Bucks

India's NRI policy is economically and socially skewed

Jairam Ramesh

The success of the Resurgent India Bonds (RIBs), albeit at high cost, and Amartya Sen's Nobel prize have once again focused attention on Indians living abroad. They are clubbed together as non-resident Indians or NRIs -- a term that has become pejorative.

The true overseas Indian (TOI) community -- the diaspora -- is probably around 15 million strong. These 15 million fall into five broad categories: roughly five million in Nepal and Sri Lanka, three million in Mauritius, Fiji, South Africa, Trinidad, Guyana and Surinam, three million in the US, UK, Canada and the Netherlands, 2.5 million in the Middle East and 1.5 million in east Asia.

Economic reforms started in China 20 years ago. Since then that country has received some $250 billion in foreign investment. About three-fourths of this has come from the overseas Chinese, a vast prosperous community numbering about 55 million. Estimates say about one-third of Chinese exports are from the investments being made by the overseas Chinese.

Indians are following three broad routes to bring dollars into India. The first involves parking their savings in Indian banks. For this, the government offers attractive rates of interest. Excluding the $4.1 billion of the five-year ribs, NRI deposits are now about $20.4 billion. This is one-fifth of our external debt. But short-term NRI deposits account for about two-fifths of the volatile component of our external debt.

The second route is through actual equity investment. NRI investment approvals since 1991 comprise a little over $3 billion, just 6 per cent of the total. The third route is through annual remittances, which in 1997-98 may well have touched $10 billion. Fifty to 60 per cent of this comes from Indians in the Middle East. The big spurt in remittances came in 1993 and 1994, when we moved over to a market-determined exchange rate system and the incentives for the hawala route diminished substantially.

Maximum policy attention and incentives have been focused on the deposit schemes. There are now five such in operation. How much of these deposits is genuine savings of overseas Indians, how much is the money of businessmen becoming NRIs for FERA and income tax purposes and how much is actually Indian money under an NRI garb is hard to fathom. Such deposits have proved costly in the past. Their withdrawal triggered the financial crisis of 1991.

Deepak Nayyar, the noted economist, has estimated that between October 1990 and March 1992 there was a net outflow of NRI deposits amounting to more than $2 billion. In addition, the Reserve Bank suffered a loss of over $3 billion on these schemes in 1990-93 because it provided an exchange rate guarantee. For some schemes, the guarantee is now provided by the Central government, while the banks assume the exchange rate risks for others.

The Indian workers in the Middle East are the true heroes. They have saved Kerala and some other parts of the country. But the government, the airlines, the banks and the emigration, customs and immigration officials all treat them like second-class citizens -- since they come from a different socio-economic strata. Yet, their remittances keep climbing -- whatever the economic conditions here, without any special incentives. They do not add to our debt and contribute to keeping our current account deficit within manageable limits. The use of remittances for consumption is good and to be welcomed. But at the same time some attempt has to be made to "guide" them towards productive investment.

Clearly, the overseas Chinese is richer and has greater investible surpluses than the overseas Indian, who, largely speaking, is either in retail trade or is a salaried employee or a professional. But it is also clear that the emotional ties of the non-resident Chinese to the mother country are far more enduring, durable and deep than they are for the overseas Indian.

Our policy towards global Indians must change from chasing their money to leveraging and networking their professional skills. Indians abroad are distinguishing themselves in a large number of fields like science, engineering, medicine, management, economics, informatics, biotechnology, agriculture, finance and energy. But this segment, which has the potential to transform and revitalise our educational, research, financial and manufacturing systems, has been largely ignored.

With faster liberalisation, many Indians will be returning to work in India. When we have a world-class patent system, we will be in a position to sell India as an attractive R&D destination. Just imagine how many top-flight Indians could return if institutions like Bell Labs were to set up shop here.

Diaspora mindsets also need to change. Jagdish Bhagwati, a prospective Nobel laureate in economics, had earlier proposed a "brain drain" tax. Poor India has subsidised the education of professional overseas Indians by at least Rs 10,000-15,000 crore over the past three decades. There has to be some spark of public service in our professional diaspora, some element of risk taking, some sense of self-motivation. Many of them belong to the privilegentsia -- and can do without inequitous sops like dual nationality.

The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own.

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