The economic impact of the Indian diaspora

For much of India’s post-independence history, Indians moving abroad have been viewed with suspicion. Students of elite colleges such as the Indian Institutes of Technology (IITs) who went abroad to take up high-paying jobs faced outright hostility. It seemed a waste of scarce national resources to educate such ingrates.

Such concerns were also voiced in other parts of the globe, with economists worrying about a brain drain from developing countries. In a 1976 research paper, the trade economist Jagdish Bhagwati famously proposed a brain drain tax on high-skilled emigrants. Pakistan even attempted to impose such a tax, before giving up in the face of protests.

Since the turn of the 20th century, public opinion on emigration has changed considerably, with many developing countries setting up dedicated ministries to reach out to emigrants. This list includes India, which set up the ministry of overseas Indians affairs in 2004 before merging it with the external affairs ministry in 2016. Emigrants began to be feted not just for the dollar remittances they send back but for being conduits of novel ideas and new investments. Today, politicians of different hues — from Narendra Modi to Rahul Gandhi — strive hard to reach out to the Indian diaspora during their trips abroad.

The change in public mood tracks a change in scholarly opinion. Over the past two decades, a growing number of research papers have documented the diaspora’s role in the development of poor countries. In particular, the positive experiences of two large developing countries — China and India — have helped reshape views on diaspora economics.

In China’s case, the diaspora played a key role in directing foreign direct investment (FDI) flows after the opening up of the Chinese economy in 1979. The early post-reform era marked an era of uneasy compromise with capitalism. The Chinese communist leadership was happy to welcome investors who could be shown to represent patriotic fervour more than capitalist instincts, the economists’ Alan Smart and Jinn-Yuh Hsu wrote in a 2004 research paper. Even special economic zones were strategically located in regions with high levels of emigrants.

The reliance on social networks to scale up enterprises and to integrate with global value chains led to a new kind of guanxi capitalism in China. In the initial post-reform era, informal social networks were a substitute for the lack of effective formal institutions and contracts. As the institutional environment developed, social networks assumed a complementary role. This kind of socially networked capitalism allowed entrepreneurs to scale up flexibly and quickly in response to market demands, Smart and Hsu argued.

Social networks of a different kind helped fuel India’s IT boom in the post-liberalisation era. As Indian engineers made their mark in Silicon Valley, it spurred demand for more hires with similar skill sets. American-Indian IT professionals not only helped their firms recruit from Indian engineering colleges but also helped outsource IT projects to India-based startups.

“The Indian diaspora’s success in Silicon Valley influenced how the world began reevaluating its beliefs about India, reflecting the reputational spillover effects of success in a leading sector in a leading country,” political scientist Devesh Kapur wrote in his 2010 book, Diaspora, Development, and Democracy: The Domestic Impact of International Migration from India. This reputational effect created a demand for Indian IT professionals even in countries without sizable Indian migrants – such as Germany and Japan. Just as a made in Japan label is a signal of quality hardware, an Indian software programmer assumed a quality tag, Kapur argued.

A similar signalling effect is also at play in other knowledge-intensive sectors such as health care and data analytics. Hence, high-skilled emigrants are now seen as the unofficial ambassadors of the country, having raised the profile of Indian workers in these sectors. The rising demand for such skills in turn raises educational investments in India. Since many with these skill sets end up working within the country, the initial brain drain can end up creating brain gain over the long run, some economists have argued.

In the case of the IT sector, several successful professionals have returned to set up their own firms here. Others have funnelled investments to scale up IT startups. The bidirectional flow of talent and capital has in turn led to greater lobbying efforts to ease such flows. The software lobby in India is among the few pro-trade lobby groups in India today, and has played a key role in easing venture capital restrictions in India and visa restrictions in the US.

The recent bonhomie between India and the US has taken many observers by surprise. For Indian Americans, this represents the culmination of decades-long efforts to bridge the gap between their adopted country and their country of origin. The Indian diaspora is perhaps the single-biggest driver of Indo-US ties today. A prosperous and politically connected community has pushed the US leadership to develop closer tech ties with India at a time when the US-China tech relationship has strained.

One reason for the divergence in India and China’s trade policies today lies in their diaspora ties. India now seeks closer trade ties with English-speaking countries which host a large Indian diaspora (such as the UK, the US, and Australia). In contrast, China is more closely integrated with Southeast Asia, which hosts a large contingent of prosperous Chinese diaspora.

Pramit Bhattacharya is a Chennai-based journalist. The views expressed are personal