India: The Growing Clout of the Diaspora

2004

Rana Ganguly

A recent study conducted by the research firm Evalueserve for the World Bank Institute has stated that the growing influence and expertise of the Indian Diaspora in countries like the US, UK and Canada will help India retain its edge and move up the value chain in outsourcing, as other countries try to catch up with it in other parameters. The study revealed that many high-level senior executives (of Indian origin), who had migrated to these countries in 1960s, were now in big corporations and influenced outsourcing-related decisions in India's favour. It indicated that: 'As the networking and mentoring role of Diaspora increases India will continue to retain the edge in outsourcing.' It also reported that some venture capitalists in the US, particularly those of Indian origin, are actively funding Indian companies that have back-end operations in India in order to save on research and development costs. Approximately 150 start-ups in the US already have some form of back-end in India and this number is likely to double by March 2006. The study suggested that the Diaspora will also provide more organised platforms for the sharing of knowledge and best practices. In addition, it is expected to increase the brand equity of the Indian industry but without giving a semblance of bias for their home country over other low-wage destinations. It is therefore abundantly clear that the Indian Diaspora has played a crucial role in India's success so far in Information Technology and Business Process Outsourcing, and is expected to increasingly play a leading role in the gradual emergence of India's high-end knowledge services sector.

Many in the large Indian Diaspora settled worldwide regularly remit sums, which amount to several billion dollars every year, to other family members still based in India. Besides, the affluent Non Resident Indian (NRI) communities are also a major source of Foreign Direct Investment (FDI) for India. Following the elections in April-May 2004, the United Progressive Alliance led by the Congress Party assumed charge of the Indian Government. Among various proposals for reform coming from the new Finance Minister, and announced in the Budget earlier this year, was a move to tax remittances from NRIs. This reform required the banks to deduct a 10 per cent tax at the source before paying interest on the NRI accounts. According to political pundits, this move had a hidden political agenda since NRIs were seen to have tilted towards the BJP during the NDA (the National Democratic Alliance led by the BJP) regime. The former prime minister Atal Bihari Vajpayee's overseas tours would almost always include meetings with NRI communities and he was highly successful in wooing them to commit to support Indian causes overseas and investments in the country. By contrast, the Congress think tank is said to have recommended using a stick rather than a carrot approach. However, it miscalculated in failing to take into account the disproportionate influence that the NRI community commands, despite their relatively small numbers and limited investments in India.

The NRIs were outraged at the proposal and complained to the Prime Minister, Ministers of Finance and Foreign Affairs as well as the newly created Ministry of Overseas Indian Affairs urging the withdrawal of this proposal. They eventually succeeded in convincing the Government that this would not only adversely affect NRI remittances, but would also prevent them from investing in future projects in India. They would have no choice but to move funds to other tax-free destinations. The government, which has been endeavouring to sustain the economic growth rates reached under their predecessors, realized that at a time when it was targeting an increase in FDI, any such development could have disastrous consequences. It has relented and finally bowed before the clout of the NRI community by withdrawing the remittance tax on their deposits as proposed in the Budget. The tax will now be considered afresh in April 2005, when the next Budget is due.

WATCHPOINT: Will the Indian Government risk imposing a tax on NRI accounts in 2005? If it does, will that lead to the withdrawal of NRI support and an exodus of NRI funds? What consequences could that have on the Indian stranglehold on the global BPO (Business Process Outsourcing) and IT sectors?

 

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