Outward remittances under the Reserve Bank of India’s liberalised remittance scheme surged by 50.64% to $9.1 billion in the April-June quarter of FY24, compared with $6.05 billion in the same period last year. The increase in outward remittances can be attributed to robust growth in various segments, including revisions in tax collection timelines within the LRS scheme, significant rises in equity and debt investments, deposits, and property purchases.
In the April-June quarter of this year, investments in equity and debt rose to $503.73 million, more than doubling from the previous year’s $223.74 million. Additionally, remittances for purchasing immovable properties experienced an impressive 122% surge, reaching $89.94 million. Deposits placed overseas also witnessed a notable increase of nearly 62%, reaching $430.59 million. International travel demonstrated a growth of almost 40%, with figures reaching $4,078 million, rebounding from the tourism industry’s challenges due to the Russia-Ukraine war.
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The government had recently tightened controls on outward remittances. The steps taken included bringing international credit card spending outside India under the LRS framework through amendments to the Foreign Exchange Management Act. The LRS of FEMA provides the guidelines for sending funds abroad. As per the revised LRS provisions, resident individuals can send up to $250,000 (approximately Rs 2.06 crore) overseas annually without requiring prior approval from the Reserve Bank of India.
Furthermore, a 20% tax on foreign remittances, excluding those for overseas education and medical treatment, is set to be implemented starting October 1, 2023. Currently, the tax collected at source stands at 5%. In the previous fiscal year, $27.14 billion (over Rs 2.22 lakh crore) were remitted under the LRS route. At the newly established 20% tax rate, the government is expected to collect a Tax Collected at Source (TCS) of Rs 22,400 crore on overseas travel expenses totalling Rs 1.12 lakh crore ($13.66 billion). This marks a substantial 185% increase from the $4.8 billion recorded by Indians in FY2019. Notably, the LRS scheme was introduced in 2004 with an initial limit of $25,000 per year.
Financial markets were swift to adapt to the latest changes in the LRS scheme. Although the tax collected at source regulations for LRS were initially slated to take effect on July 1, 2023, the government subsequently postponed it to start in October. Following this change, remittances for the maintenance of close relatives saw a rise from $1.027 million in the prior year to $1.831 million in the most recent quarter. It is anticipated that the upward trend in these categories will continue in the coming months as Indians capitalise on the benefits of the revised timeline.
In contrast, inward remittance growth in India is predicted to be modest at 0.2% this year, as indicated by the World Bank’s latest Migration and Development Brief. This stands in stark contrast to the remarkable growth of over 24% in 2022, when the country received $111 billion in remittances, significantly surpassing the World Bank’s projected $100 billion. Factors contributing to the current subdued growth include sluggish growth in OECD and GCC economies and the impact of a higher base effect.
In India, the services sector in foreign countries plays a pivotal role in remittance inflows. Highly-skilled Indian migrants, often in the high-tech sector, account for roughly one-third of the nation’s remittances. However, this year saw slower growth in OECD economies, particularly in the United States and European Union, which impacted the demand for information technology professionals. The Gulf Cooperation Council countries also experienced diminished demand for migrant labour. This situation is exacerbated by a looming recession affecting key global economies, thereby impacting migrants employed in China, Malaysia, and Thailand’s manufacturing sectors.
Inward remittances are of paramount importance to the economy of any nation, especially in the aftermath of the Ukraine-Russia conflict and the ongoing effects of the coronavirus pandemic. Remittances serve as a significant source of foreign exchange for India and other South Asian countries. Last year’s impressive performance served as a macroeconomic buffer for India’s external sector. In 2022, India accounted for 63% of all remittances to South Asia, contributing to a growth rate of over 12%, amounting to $176 billion.