Flight of Personal Capital Under LRS May Exceed Inbound FDI This Year

The Economic Times has reported a massive surge in the outflow of dollars in May under the Liberalised Remittance Scheme (LRS) window of the Reserve Bank of India, which allows Indians to take up to $2,50,000 out of the country every year. May saw a 40% year on year increase in the outflow, which reached $2.9 billion. Such a big surge in dollar outflows via the LRS window has been worrying the government no end. In 2022-23 the total forex outflow under the LRS window was close to $28 billion, nearly a 30% increase over the previous year.

Going by the May outflow figure of  $2.9 billion, this year the annual number may well exceed $35 billion. For the sake of comparison, it must be noted that total outflows effected by individuals via the LRS window was only $1.3 billion in 2014-15, the year Modi took over as Prime Minister.

These are the annual LRS outgo figures (in $ million):

The scale of increase in the outgo since 2014-15 is a bit of a puzzle. The $28 billion outflow in 2022-23 is, incidentally, equal to the net FDI inflow into India in the same period!

It does seem a bit odd that money taken out by individuals via the RBI’s LRS window should be as much or more than net FDI inflows. In the current fiscal, the LRS outflows could exceed net FDI inflows.

This is worrying the government, which recently tried to levy a 20% tax at source on all LRS remittances by individuals above a limit of Rs 7 lakh. The tax levy was postponed to October because banks were not ready with systems to monitor the LRS scheme closely.

The government seems to assume that 50% of the total remittances are travel-related. Money is also taken out by individuals to educate their children abroad. This constitutes less than $2 billion of the annual LRS outgo.

It appears that the travel-related outflow of about $14 billion in 2022-23 hides other expenses linked to the number of Indian millionaires who have taken residency abroad since 2014-15. On average, 6,500-7,000 millionaires have left the country every year since 2014-15, the year Modi came to power. This marks a roughly 50% increase in the annual exodus, compared to the period before 2014-15.

Some analysts say that every other small and medium scale business family is hedging by sending one or two members abroad to take residency. This could have led to a significant  increase in associated expenditures like buying property abroad, spending on maintenance of a home and other investments in equity and deposits.

This has also contributed to the unprecedented surge in the forex outflows via the LRS window in recent years. This is likely to continue even if a 20% tax at source is imposed, which is in any case refundable. The RBI data  indicates that 80% of the LRS outflow comprises travel, property and equity purchases abroad, and gifts and maintenance expenses for staying abroad.

In sum, the surge in the LRS outflow has something to do with rich Indians who want to park some money and investments outside Indian territory, fearing this regime’s arbitrary enforcement and tax policies. The magnitude of outflows is not explained by a post-Covid surge in tourist travel alone.

The trend is clear: LRS outflows were increasing massively even before the COVID-19 period, from 2014-15 to 2019-20. Indians tourists couldn’t have started travelling a lot more after Modi came to power. The surge cannot be explained by outward tourism alone. There is something else happening which calls for deeper inspection. It is not normal that the individuals taking money abroad via a special window exceeds the net FDI inflows, which is a distinct possibility in this fiscal year!

This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.

The Wire is now on WhatsApp. Follow our channel for sharp analysis and opinions on the latest developments.