Turning the clock back – on Liberalised Remittance Scheme

Source: This post is created based on the article “Turning the clock back” published in Business Standard on 26^th April 2023.

Syllabus Topic: GS Paper 3- Indian Economy, Liberalisation

Context: In the recent times, government has tightened the restrictions on how Indians can remit money overseas.

Post-1991 reforms, Liberalised Remittance Scheme, or LRS was introduced. It permitted individuals to send $250,000 out of the country, in a calendar year.

The limit was reduced to $75,000 in 2013 as a macro-prudential measure. However, this limit was gradually restored to earlier $250,000.

This policy depicted confidence in the Indian economy’s strength, rupee’s float and the sustainability of the country’s external account.

However, in recent years, this policy has been reversed. The government has systematically tightened the restrictions on how individuals can remit money out of the country.

What are the changes introduced linked to the outward remittances?

First, the finance bill of the last session of the parliament has increased the TDS on remittances to 20% from the earlier 5%.

Second, Purchases done through the credit card abroad are also being sought to be brought into the regulatory net by the government.

Third, Furthermore, Reserve Bank of India has set a 180-day limit on any funds sent outside the country. Within this period, the funds either should be invested in any instrument or repatriated.

The funds in the foreign deposit accounts will not be considered an investment.

What are the implications of tightening of outward remittances?

Due to repatriation of the money, it will cycle back in the economy. It will lead to an increased transaction cost.

Globally, restrictions on remittances are seen as a sign of insecurity among policymakers about the direction of the economy.

It reduces the freedoms to Indian investors, where and how they like to invest.

High levels of restrictions for such transfers will increase the incentive for evasion or the return of illegal and opaque systems.