Rising outward remittances

With foreign travel and studying abroad accounting for the bulk of the remittances by Indians, using a sledgehammer may not work

In the current debate over how India’s current account deficit has widened and what measures need to be taken to keep it under check, there has often been a mention of the rapidly rising outward remittances by Indians in the last few years. The obvious purpose of the suggestion is to underline the need for a proper diagnosis of what has contributed to the rise in outward remittances in the last few years and whether these can be reined in and, if so, with what kind of measures. 

A recent compilation of India’s outward remittances under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India has shown how the aggregate figure on remittances has shot up. The compilation, prepared by Gurumurthy K of Business Line Research Bureau, shows that India’s outward remittances shot up from $1.16 billion in 2010-11 to $11.33 billion in 2017-18, an increase of nearly 10 times in just seven years. 
 

A closer look at the data shows an interesting trend. The annual outflow of dollars through remittances ranged between $1 billion and $1.33 billion between 2010 and 2015. These remittances amounted to just about 1.2 to 5 per cent of the current account deficits in each of the years during this period. 

The situation changed dramatically from 2015-16, when Indians remitted $4.64 billion, which was 248 per cent more than the previous year. In 2016-17, the outward remittances increased by 76 per cent to $8.17 billion. And in 2017-18, the growth slowed a bit to 39 per cent with total remittances estimated at $11.33 billion. In this period, the remittances were large enough to be as much as 21 per cent of the current account deficit in 2015-16, 57 per cent of the deficit in 2016-17 and 23 per cent in 2017-18. 

One possible explanation for the rise in remittances could be that the LRS cap was relaxed in 2015 allowing an Indian to remit up to $250,000 a year. Remember that LRS, under which Indians can spend in foreign currency for travels, maintenance of relatives abroad, medical treatment, gifts, education and investment in debt, equity and even in real estate, was tightened in August 2013 in the wake of India’s rising current account deficit and the US Fed Reserve’s plan to wind down its bond buying programme.

As part of that tightening in 2013, the LRS limit was lowered to $75,000 a year per person, from the earlier cap of $200,000. As the balance of payments situation got better, the LRS limit was relaxed in two phases — from $75,000 to $125,000 in June 2014 and again to $250,000 in May 2015. The tightening was done by the Manmohan Singh government and the relaxation followed during the regime of the Modi government. Whether the relaxation led to the rise of outward remittances, however, is not clear as in spite of the annual LRS cap staying at $200,000 per person between 2011 and 2013, the outflows stayed at around $1 billion per year in that period. 

However, more significant than the aggregate increase in remittances is the change in the composition of the spending categories after 2015. The single-largest item on which Indians spent in foreign currency till 2014-15 was gifts, followed by foreign education, investments in equity or debt and maintenance of close relatives abroad. Their combined share in each of the years between 2010-11 and 2014-15 was in a range of 70 to 79 per cent of the total amount of outward remittances. 

The scenario changed dramatically from 2015-16 onwards. Gifts and investments in equity or debt dipped significantly, replaced by spending on foreign travels that saw a spurt. The spend on maintenance of close relatives and studies abroad continued to account for a large share. Thus, only three items accounted for 70 to 79 per cent of the total amount of outward remittances in the last three years. And these were: Travels, maintenance of close relatives abroad and foreign education. The bulk of the expenditure under maintenance of close relatives abroad was accounted for by overseas students. Thus, essentially, foreign education and travels accounted for about three-fourths of India’s remittances abroad. 

The larger point is that total outward remittances are still relatively small at just about $11 billion last year. Scaling down the cap on LRS in such a situation will be like using a sledgehammer to crack a nut, which will also cause unnecessary panic. Instead, it would make sense to draw the right lessons from the pattern of foreign currency spending by Indians. If foreign travels and studying abroad account for almost three-fourths of Indians’ outward remittances, the policy should perhaps focus on strengthening domestic tourism infrastructure and building better universities. In the short run, such measures will not make much of an impact. But in the long run, the overall benefits for the economy will be substantial.