Turning the clock back

New rules on remittances may rein in legal transfers

The government and the central bank have over months and years systematically tightened restrictions on how Indians can remit money overseas. The Liberalised Remittance Scheme, or LRS, is one of the signature achievements of the post-1991 reforms. By allowing individuals to send money out of the country up to an amount of $250,000 a calendar year (at current levels), it revealed a degree of confidence in the Indian economy’s strength as well as in the rupee’s float and the sustainability of the country’s external account. Countries that are nervous about outflows and possible crises do not allow their citizens to send money out for investment or travel. Restrictions on remittances tend to be seen globally as a sign of insecurity among policymakers about the direction of the economy — which is, for example, the lesson that was taken by many after the Chinese government cracked down on individual remittances some years ago. When the yearly LRS cap was lowered from $200,000 to $75,000 in 2013, everyone knew it as a symptom of the severe stress India’s external account was in, and taking it above $100,000 after Narendra Modi became Prime Minister in 2014 was a sign of confidence.

This image of self-confidence now appears in jeopardy thanks to various policy actions. The Finance Bill, passed in the last session of Parliament, included a clause that 20 per cent of remittance transactions would be subject to tax collected at source. Naturally, this can be recovered at the end of the tax year but it is a significant inconvenience. Even purchases done through the credit card abroad are being sought to be brought into the regulatory net by the government — without any explanation as to what the scale of evasion, if any, through transparent credit-card purchases could possibly be. Even more concerning, the Reserve Bank of India has set a 180-day limit on any funds sent outside the country. By this, unless they are put into specified investment instruments by that period, the funds have to be repatriated. Oddly, it seems that deposit accounts abroad — even though they provide significant value and, in these days of high inflation in advanced economies, have fairly competitive interest rates — may not be considered an adequate investment and so sums in foreign deposits are being redeployed or repatriated by many. Forcing this money to be cycled back and forth significantly adds to transaction costs.

The reform period introduced the presumption into financial regulation that individuals should have the right to invest where and how they like. No Indian needs to make any excuses, any more, about choosing to globalise their interests and investments. It appears that this basic understanding is now being rolled back by stealth. This is bad in principle since it reduces the freedoms available to Indian systems. In any case, over half the outward remittances from India are for simple and obvious purposes such as travel and education. It is also bad pragmatically, since it sends out the message that the Indian establishment is concerned that “too much” money is leaving the country, which is a clear negative sign about relative economic prospects. Finally, the more the restrictions on legal, safe and transparent methods for such transfers, the greater the incentive for evasion or the return of illegal and opaque systems.