Amid the government’s efforts to attract foreign direct investors as well as foreign portfolio investors (FPIs), the country witnessed its highest ever monthly outflow of $1.69 billion under the liberalised remittance scheme (LRS) by resident Indians in the month of July.
With this, the outflow of money under the LRS scheme has hit $5.8 billion in the first four months of FY20 and aggregated to over $45 billion (Rs 3.15 lakh crore at exchange rate of 70 to a dollar) since the Narendra Modi-led NDA first came to power in May 2014.
By comparison, in the five year period of UPA II, between April 2009 and March 2014, the aggregate outward remittance under LRS amounted to $5.45 billion.
Under the Reserve Bank of India’s (RBI) LRS, resident individuals are allowed to remit up to $250,000 in a financial year under various heads including current account transactions such as going overseas on employment, studies overseas, emigration, maintenance of close relatives, medical treatment among others.
The residents can also transfer money for capital account transactions under LRS including opening of foreign currency account overseas with a bank, purchase of property and making investments in units of mutual funds, venture capital funds among others.
RBI data shows that over the last five years, while outward remittance under LRS on account of travel amounted to over $14 billion, almost $10.5 billion was on account of maintenance of close relatives and $10 billion was sent for studies. Another $4.8 billion was remitted under the head of gifts and $1.9 billion for overseas investment in equity and debt.
By comparison, in the previous five-year period between FY10 and FY14, the amount remitted by Indians abroad on account of travel amounted to mere $129 million and that for maintenance of close relatives stood at $992 million. Similarly, for the purpose of gift, resident Indians remitted $1.17 billion in the five-year period.
The outflow of funds by resident Indians under LRS over the last five years has almost negated the inflow of funds by FPIs in the same period.
While FPI’s have invested a net of Rs 176,212 crore into Indian equities since April 2014, they have invested a net of Rs 260,017 crore into the debt market in the same period.
Investment experts and those in the business of fund management say that the sharp rise in outflow of funds under LRS scheme over the last five years indicates the flight of capital and small- and mid-sized businessmen from India.
“Small businessmen and entrepreneurs who are relatively affluent are looking to shift their base out of the country,” said the chief executive officer of an investment firm.
Flight of capital could weaken investment activity
A sharp rise in outward remittance under LRS indicates that India is witnessing flight of capital by residents amidst weak private investment climate and declining GDP growth rates. If businesses shift their base, it not only hurts investment and job creation in India but also makes rupee volatile against dollar.
The head of a financial services company said that there is growing concern among people over social harmony and peace in the country, along with worries pertaining to harassment by tax officials, which is leading many individuals (who belong to relatively affluent class) to shift their base.
“It is a worrying trend. Had even 50 per cent of this money stayed back in India and got invested in businesses, it would have resulted into a big multiplier effect in terms of job creation and growth of the economy,” the person said.
Another market expert said that the rise in tax rate from around 35 per cent to 43 per cent now (for those in the highest tax bracket) is also not helping the cause. “Many rich Indians feel that by paying such high rates of tax in a developed country, they can get a better quality of life,” he said.
Some feel that the government must look to arrest this pace of outflow.
Sources say that while enquiries for permanent residency has almost doubled over the last one year, many affluent Indians are looking to shift their base to the US, Canada, the United Kingdom, Spain, Portugal and Dubai among others.
A source said that over the last six-eight months, there has been a rise in EB5 Visa Green Card applications for US (for US residency and citizenship), as the United States is set to increase the fee for such application by 80 per cent from $500,000 currently to $900,000 beginning November 2019.
However, another immigration advisor said that the EB5 market in India is small at the moment and the pace of activity has further slowed down over the last one-month, as the applications that come now would ultimately have to pay $900,000, since it takes around two months for all paper work and checks to complete.