The Reserve Bank of India recently released data indicating a substantial dip in the amount of money Indians are sending overseas, showing a 61% decline under the Liberalised Remittance Scheme (LRS). This downward trend is attributed to the debilitating impacts of Covid-19 and the resulting lockdown on the global economy, as well as the shuttering of international travel corridors.
Significant Decrease in Outflows
In April 2020, Indians remitted under the LRS a total of $499.14 million, a sharp decrease from the same time last year where the figure stood at $1,287.91 million. This is the most significant drop since February 2016 when it was $449.28 million. The areas experiencing the most significant declines in outflows include purchase of immovable property abroad, investment in equity or debt, deposits, gifts, and money sent for medical treatments and other expenses.
Major Shakeup in Financial Trends
The decrease can be attributed to three primary causes: economic distress, domestic lockdowns, and restrictions on overseas travel. Last financial year, resident Indians had successfully remitted a record total of $18,750 million under the LRS by the end of March 31, 2020. However, even with these impressive statistics, there was a noticeable dip in the month of March 2020, when transfers decreased from $1,476.82 million in the previous year to $1,358.82 million.
Downslide in Travel and Education-related Transfers
The travel sector witnessed the steepest decline, experiencing a 71.81% reduction in remittances down to $121.13 million in April this year, from $429.75 million the previous year. This is a significant reduction considering 2 million Indian nationals travel overseas every month. Similarly, money sent for overseas studies experienced a drastic downturn with a 68.85% decline from $252.84 million last year to only $78.76 million this April.
Reduced Support to Overseas Relatives
In the same vein, money sent for the maintenance of close relatives abroad, which usually contributes the highest amount to total outward remittances under LRS, saw a decline of 50% from $296.14 million last year to $148.25 million this year.
Mixed Impact on Investments and Donations
The categories of deposit and investment in equity or debt witnessed a lesser decline of 29.91%. The exceptions to the trend were donations intended for charity or social service, which surprisingly did not see any increase or decrease in outflows.
The Effect on Gifts and Medical Treatment Expenses
Meanwhile, the category “Gift” experienced a sharp decrease of 66% in outward remittances. Similarly, money sent for “medical treatment” underwent a decline of 45.85%.
Future Financial Implications
Experts speculate that the reduction in outflows for elements like education, medical treatment and maintenance of relatives could endure beyond the travel ban and Covid due to financial strain. Also, investments in shares and debt instruments used to buy properties abroad may decrease. Simultaneously, there might be a reduction in the opening of foreign currency accounts with banks outside India.
The Liberalised Remittance Scheme (LRS)
The LRS was introduced by the Reserve Bank of India in 2004. Under this scheme, all resident individuals, including minors, can freely remit up to USD 2,50,000 per year for any permissible current or capital account transaction. However, corporations, partnership firms, Hindu Undivided Family (HUF) and Trusts are not eligible under this scheme.
Permitted and Prohibited Transactions under LRS
The LRS permits expenses related to travel, medical treatment, study, gifts and donations, maintenance of close relatives and more. Investments in shares, debt instruments, and the purchase of immovable properties abroad are all sanctioned. On the contrary, purchases of lottery tickets, trading in foreign exchange abroad, remittances to non-cooperative countries and territories identified by FATF or remittances for acts of terrorism are all prohibited.
Mandatory Requirements for LRS Transactions
For all transactions under the LRS through Authorized Persons, it is mandatory for the resident individual to provide his/her Permanent Account Number (PAN).