What is the most economical way to pay people and companies in India from the US?

For the past several years we have used Paypal to pay freelancers and outsourcing companies in India. But as of March 1, 2011, it appears that Indian banking laws have changed and we can no longer use Paypal without our Indian friends getting stiffed with some serious fees by their bank. If I was paying an individual, I could use Western Union. It's quite a bit more expensive than Paypal fees used to be (<3% to something like 8%) and it is inconvenient for both the sender and the recipient. On top of that, Western Union can't be used for paying a company. So that leaves me with international wire transfers that cost $45 USD from my bank (Bank of America) and my Indian friends end up paying $17.50 USD on their end to receive it. Is there a more economical way to send payments between $500 USD and $2,000 USD from the US to India? And while you are at it, how about the sending payments to Pakistan?

I am from India and yes almost all small businesses who were dependent on PayPal got affected because of the recent problems of RBI (Indian regulatory bank) with Paypal. (and payment gateways in general).

For transactions less than $500, you'll still do the business-as-usual. It's the incoming transactions above $500 that are no more allowed by PayPal for Indian PP account holders.

Two solutions for you -

1. I have heard to overcome this problem freelancers in India are asking their clients/affiliate companies to divide the payment > $500 into chunks of $500. You may want to try the same.
2. You can also ask your service providers to integrate ccAvenue Payment gateway in their websites. Though this PG is not as user friendly as PayPal but still feelancers/companies will be able to save a lot of fee compared to Wire Transfer and other costly options. (Setting up ccAvenue is a pain though and for us it took around 15-20 days to get it up and running)

All the best!

I don't have knowledge about the US banking system and their fees. But in general, what I see is:

1. PayPal. If the fees are not totally unreasonable, then PayPal is often the way to go. There are plenty of horror stories about Paypal seizing funds on suspected fraud and offering shitty customer service, and the stories are all true, but PayPal is sadly still the lowest-hassle option for smaller amounts.
2. SWIFT transfer. This may be what you called "international wire transfer", but on a few occasions I have seen US banks use something other than SWIFT. In some cases a small business oriented homebanking / ebanking solution can enable you to do SWIFT transfers yourself, saving on the fees.
3. Board an airplane with plenty of cash in your pockets. Seriously. Obviously you'd only want to do this if you visit them in-person at regular intervals anyway, f.x. for design review meetings and team-building purposes. And you must check the laws about bringing cash on person first -- in many countries the limits are reasonably high; but in others they're not. (Where I live it's 10.000 € without declaring anything, or more or less any number if I declare the intent to travel with cash to Customs beforehand, and provide a reason.)

Well this is a doubt I have after reading all the answers :

Is it not possible for one to breakup an amount into different $500 and send it across to India via PayPal (i.e if its not too big an amount) and not get charged ?

Since 2012 companies like Payoneer, Incheckonline and Chexx Inc have offered both domestic Indian checks and domestic direct deposit. These are B2P solutions targeted to affiliate, freelance and so on.

I think @Jesper has covered the key items. I would add a variant to his version 3.

Fly over a few times a year say 3 or 4 carrying the cash. Put it in a bank account or with an Indian lawyer/accountant/someone you can trust who, for a small fee, can handle the monthly payments on your behalf.

But really direct transfer from bank to bank is the best solution ...

Can they process credit cards there? you could setup a seperate direct debit / credit account (VISA/MASTERCARD) and only transfer the payment amount in there each month. They can then process it as a card payment ... not sure the fees but might be worth looking into.

OK, here is a solution: work with us and we will cover all banking cost. How about that? :)

I am not really joking, when we make a deal with a customer, we agree on payment terms. Sometimes we cover the cost sometimes customer coves the cost, depending on the overall terms and deal.

Bank wires are great way for sending money to the companies. Yes, it cost some money, but again, you earn much more than that banking cost.