Outward remittances under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS) reached a record high of USD 19.61 billion in the fiscal year ending March 2022, showing a significant rise from USD 12.684 billion in March 2021. Foreign exchange transfers by resident Indians, including transfers in US dollar and euro, surged by 54.60%. The LRS is a policy introduced by the RBI in 2004 allowing all resident individuals to freely remit up to USD 2,50,000 per financial year for any permissible current or capital account transactions.
Understanding Remittances
Remittances are financial or in-kind transfers made by migrants to their friends and families in their home countries. They consist of two main components: personal transfers between resident and non-resident households and compensation of employees who work in another country for a limited period. Remittances stimulate economic development in recipient countries, but over-reliance on them can pose risks.
Defining Outward Remittance
Outward remittance involves transferring funds in the form of foreign exchange by an individual in India to a beneficiary outside India (except Nepal and Bhutan) for purposes permitted under Foreign Exchange Management Act (FEMA), 1999.
Examining the Trend in Outward Remittance
In FY22, outward remittances witnessed an unprecedented high due to increased spending by Indians on international travel and overseas education following a slowdown due to COVID-19.
Segments of Outward Remittances
The segments of outward remittances include international travel, overseas education, gifts, and investments in overseas equity and debt.
Detailed Overview of Outward Remittance Segments
In FY22, India’s spending on international travel amounted to USD 6.91 billion, which is over double the amount spent in FY21. Spending on overseas education also increased by 35%, with remittances totalling over USD 5.17 billion. In the same year, gifts and investments in overseas equity and debt by Indians rose to USD 2.34 billion and USD 746.5 million, respectively.
An Insight into the Liberalised Remittance Scheme
The LRS is a scheme introduced by the RBI in 2004, allowing all resident individuals to freely remit up to USD 2,50,000 per financial year for any permissible current or capital account transaction or a combination of both. It is not available to corporations, partnership firms, Hindu Undivided Families, trusts, etc. Once a remittance is made for an amount up to USD 2,50,000 during the financial year, a resident individual would not be eligible to make any further remittances under this scheme.
Understanding Current and Capital Account Transactions
Current account transactions are those by a resident that do not alter his/her assets or liabilities, including contingent liabilities, outside India. They include payments related to foreign trade, foreign travel expenses, and education expenses among others. On the other hand, capital account transactions alter a resident’s assets or liabilities outside India, such as investments in foreign securities and acquisition of immovable property outside India.
UPSC Civil Services Examination: Previous Year Questions
In the 2013 UPSC Civil Services Examination, one of the questions asked was about what constitutes a capital account. The correct answer was that a Capital Account includes foreign loans, foreign direct investment, and portfolio investment while private remittances come under the Current Account. The Capital Account reflects the net change in ownership of national assets, unlike the Current Account which reflects a nation’s net income.
