Outward remittances under the liberalised remittance scheme (LRS) have gone up by 50.64% to $9.1 billion in the April-June quarter of FY 2023-24, according to the data released by the Reserve Bank of India (RBI) in August. During the same quarter in FY 2022-23 it stood at $6.05 billion.
Outward remittance is the process of transferring funds in the form of foreign exchange by an Indian account holder to abroad for several reasons like business, education, medical treatment, emigration, investment in and international markets among others. The outward remittance process is guided by the Liberalised Remittance Scheme (LRS) which is part of the Foreign Exchange Management Act (FEMA) 1999. Under LRS guidelines all resident individuals, including minors, are allowed to freely remit up to US $250,000 per financial year.
Key factors that led to the spike in outward remittance include travel, tourism, education, investments by Indians in international markets, and medical reasons.
While economists suggest that better outward remittance from India may boost the internationalisation of the Indian rupee, some suggest that the country needs to be cautious to ensure that the outward remittance is at a balanced state with the foreign portfolio investment and foreign direct investment (FPI and FDI) coming to India.
The Core reached out to several economists and market experts to get a better understanding of what are the underlying causes behind the sudden spike in this outward remittance and how it could affect the Indian economy.
Indians Invested More Money Abroad
Equity and debt almost doubled to $503 million from $223 million. Deposits overseas were also up by 62% to $430 million.
“Indians seem to be investing more money abroad in both debt and equity funds. In the past year, due to the rate hike by most of the central banks, the rates have gone up for some of these investment instruments. In part this could explain the increase in outward remittance among other factors. This seems to be part of perhaps a structural trend of higher interest in global investment opportunities by indians," said Sakshi Gupta, principal economist at HDFC Bank.
Several investment firms have been assisting Indian clients in investing in stock markets around the world in recent years. Even younger investors are now taking the risk of investing outside of India because the profits are substantially higher.
“People tend to invest more in tech companies like Google, Microsoft. We have seen in the past few years the number of investors from India investing in the US stock markets have gone up considerably. Apart from such big tech companies, recently, people are also showing interest in other companies and sectors, for investment purposes,” said Viram Shah, co-founder, & CEO of Vested Finance-US Securities and Exchange Commission Registered Investment Adviser, a firm that helps Indians invest in the US stock market.
Economists pointed out that the sharp differences between outward remittances from India could also be attributed to the global economic turmoil because of the Russia-Ukraine War, which started in February 2022. The pandemic too had taken a toll on Indians travelling abroad and investing.
Sakshi Gupta said the Russia-Ukraine War created a turbulent situation in the global market and it impacted the investors' sentiment to a larger extent.
The outward remittance for the first quarter of FY 2021-22 stood at $6.04 billion, while the total outward remittances under LRS was $19.6 billion in that financial year.
Foreign Travel Boom
After two years of restricted travelling because of the Covid-19 pandemic, 2023 saw a huge jump in the number of Indians travelling abroad. Data from the Ministry of Home Affairs’ Bureau of Immigration showed that in 2022 the number of Indians travelling internationally went up by 137% as compared to 2021. This was, however, not up to pre-Covid levels. Indians made international trips despite sky high air fares.
Aditi Gupta, economist, at Bank of Baroda told The Core, “Out of the total US$ 9.1bn of outward remittance from India in Q1FY24, almost half was accounted for by travel. This is also apparent in international air passenger traffic, which has seen a sharp jump.”
As the Ministry of Finance announced higher taxation on foreign travel, people tend to plan international travel before the taxation is implemented.
“Higher outward remittances can also be explained in part by the announcement of higher tax collected at source (TCS) by the government in the Union Budget. The increased TCS of 20% was earlier scheduled to be applicable from 1 July 2023, but subsequently it was deferred to 1 Oct 2023,” said Aditi Gupta.
A new tax collected at source regime with higher tax deductions - albeit refundable later - is set to kick in on October 1 and Indians are believed to be using this window as much as possible.
According to Aditi Gupta, another factor that contributed significantly to the spike is the Indian diaspora abroad. The gift segment rose to $1.3 billion from $770 million. And maintenance of close relatives was upto $1.8 billion, up 78%.
When the travel ban was lifted, many Indians started going abroad for higher education. Data produced at the Lok Sabha in the Monsoon Session this year showed that Indian students going abroad for higher education recorded a six-year high in 2022 at 7,50,365, according to the education ministry data submitted in Parliament during the winter session in February 2022.
Thus during the fall intake (September -2022) in the universities abroad, the number of Indian students going overseas has increased by 68% in comparison to 4,44,553 students going abroad in 2021, the data showed.
This also had an impact on increased outward remittances as these students paid tuition fees and other accompanied expenses for living abroad.
The Core checked out the average tuition fees for higher education in countries like the US, UK, Australia, Canada, and Singapore. As per the British Council Estimate, postgraduate tuition fees for international students in the UK vary from £9,000 - £30,000. The average cost is estimated to be around £17,109 per year. The average cost of a master's degree for Indian Students in the US is between $30,000 and $120,000 per year, and for Australia, it ranges from $15,000 - 20,000 a year, as per the estimates of IDP Global, a global education service.
Impact On The Indian Economy
Economists pointed out that random surges in the outward remittances might affect the current account deficit unless there was a balanced flow of foreign investments too.
“The FPI inflow is helping us to balance our current account deficit. The LRS is putting some stress on the external balance. Currently, the FPI flow is high, but we need to keep in mind that it is not steady. In some months, FPI flow is negative also, however, outward remittance under LRS is going up on a sustained basis in last one decade,” said Soumyajit Niyogi, director, India Ratings & Research, Credit Rating and Research Agency.
He said that there was already a merchandise trade deficit and if the outward remittance was constantly growing, it could put additional stress on the overall external balance.
According to economists, for a developing country like India which runs a large trade deficit, remittances are important as they help in managing the current account.
In Q1FY24, outward remittances of US$ 9.1bn have been more than offset by FPI inflows of ~US$ 14bn. Hence, the overall impact on India’s balance of payments and foreign exchange reserves in the period still remains positive.
“FPI flows tend to be volatile and hence cannot be solely relied on to mitigate the impact of higher outward remittances. While FPI inflows have been positive for the last few months, the tide can turn at any given time, as FPI inflows by their very nature are speculative. FPI outflows combined with a further pickup in outward remittances can worsen India’s balance of payments leading to depletion of foreign exchange reserves. This will put pressure on Indian currency,” said Aditi Gupta.
Currently, there are limited risks of such a situation materialising, said economists. This is because India’s favourable growth macros combined with a weakness in China’s growth, make it a preferred choice for foreign investors. However, even if there is a slight risk factor involved, the government won’t try to curb the outflow as it would work against the globalisation of the rupee.
“The government won’t put many restrictions on outward remittance as they want to boost the internationalisation of the Rupee unless there is an emergency situation and any crisis arises. India needs to have a currency that is more free-floating,” said Niyogi.