BQ Explains: Are Outflows Under The Liberalised Remittance Scheme A Concern?

An increase in outflows under the Reserve Bank of India’s Liberalised Remittance Scheme has raised some concerns about why Indians are choosing to send more money overseas.

Outflows under the scheme, which permits each individual to remit up to $250,000 a year, rose to $1.69 billion in July from $1.4 billion in June. In July last year, remittances under the LRS were at $1.2 billion.

Is The Data Alarming?

While remittances under LRS were at a peak in July, such outflows have been steadily rising over the years. In fact, the percentage increase in outflows has reduced over the last two financial years for which data is available.

Outflows jumped 76 percent in FY17 to over $8 billion and by another 39 percent in FY18. The increase in outflows in FY19 was a more modest 22 percent.

In FY20, however, there is a renewed pick-up in outflows. So far this fiscal, outflows under LRS have risen 40 percent year-on-year in the April-July period.

The quantum of outflows by themselves is not a cause for alarm, said R Gandhi, former deputy governor of the Reserve Bank of India. Outflows of $10-15 billion in a year for an economy of India’s size should not qualify as “flight of capital,” Gandhi said.

What Is The Money Being Spent On?

The LRS allows residents to remit money for a few broad purposes. These include travel, educational expenses, medical treatment and maintenance of close relatives. Residents can also remit money for deposits and investment in debt and equity.

A break-up of the LRS shows that funds are remitted across the travel, educational expenses, maintenance of close relatives and ‘gifts’ category.

Over the years, the sharpest increase has been seen in the travel category, where outflows have jumped from $651 million in FY16 to $4.8 billion in FY19.

The categories seeing an increase in FY20, on a year-on-year basis, follow a similar trend.

Travel outflows are up nearly 52 percent in this period, while outflows on account of deposits are up 44 percent. Money sent overseas for educational purposes is up 58 percent year-on-year.

Is There Scope For Misuse?

The data has raised questions over whether Indians are actually travelling more or whether the facility is being misused?

A senior lawyer, who spoke to BloombergQuint on the condition of anonymity, said that banks monitor the purpose for which cash is going out and this information is made available to the Reserve Bank of India. The same is also tracked through your income tax returns as well.

According to Gandhi, instances of misuse can always crop up and enforcement agencies can look into these. He, however, argued that the quantum of outflows are not alarming from a macro-economic standpoint.