In
recent years, well-to-do Indians have been sending
foreign exchange abroad to acquire assets either directly
or indirectly, through their relatives resident in
foreign locations. In 2010-11, for example, Indian
residents invested $266 million (around Rs. 1,300
crore) in equity abroad and bought immovable property
worth $66 million. That aside they gifted money to
or financed the expenditures of kith and kin abroad
to the tune of around $500 million (Rs 2,500 crore)
in that year. Add to this, remittances abroad for
purposes such as studies, travel and medical treatment,
and what is termed ''outward remittances by resident
Indians'' by the Reserve Bank of India totalled $1.2
billion in 2010-11.
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That might seem small relative to the magnitude of
India's trade and of capital inflows into the country.
But it is a figure that is rising. Estimated at $9.6
million in 2004-05 and $72.8 million in 2006-07, the
figure jumped to $440.5 million in 20007-08 and has
almost tripled itself by 2010-11.
The spurt in capital outflow was, of course, policy
induced. In February 2004 the government announced
a new Liberalised Remittance Scheme for Indian residents,
marking a small but significant push in the direction
of full rupee convertibility. Under the Scheme, resident
individuals were permitted to convert rupees into
foreign exchange to acquire and hold immovable property
or shares or debt instruments or any other of a set
of specified assets outside India, without prior approval
of the Reserve Bank. They were also permitted for
this purpose to open, maintain and hold foreign currency
accounts with banks outside India for carrying out
transactions permitted under the Scheme.
The scheme seems to have been motivated by the need
to increase demand for foreign exchange in the country,
to exhaust a part of the large flows of foreign capital
that were finding their way to India. But when the
scheme was launched, the ceiling on transfer for capital
account purposes was set at $25,000 per person per
calendar year. Finding the flow inadequate for its
purposes the government hiked the ceiling to US $
50,000 in December 2006 (per year) and further to
US $ 1,00,000 (per year) in May 2007. At that point,
remittances towards gift and donation by a resident
individual as well as investment in overseas companies
were subsumed under the scheme and included in the
ceiling. This too proved insufficient and the ceiling
was raised just four months later in September 2007
to $200,000 per person per year. This implies that
a family of five would be permitted to transfer a
total sum of a million dollars a year under the heads
of investments and gift. This is what has resulted
in the remittance trickle out of the country turning
into a significant drain.
Note that 2007-08 was the year when India was the
target of a foreign (fixed and portfolio) investment
surge. Investment inflows rose from a historical peak
of $29.8 billion dollars in 2006-07 to $62.1 billion
dollars in 2007-08. Along with this surge in capital
inflows, foreign currency assets with the Reserve
Bank of India rose from $192 billion on March 31,
2007 to $299 billion on March 31, 2008. Very clearly
the capital inflow surge was forcing the central bank
to buy up the surplus foreign exchange in the country,
to prevent excessive appreciation of the currency,
since that was eroding the competitiveness of India's
exports. The result was that the RBI was burdened
with excess foreign reserves, and was therefore finding
it difficult to control money supply. Managing monetary
policy and the exchange rate at the same time was
proving a problem. In response, the government decided
to stimulate demand for foreign exchange from the
private sector. To that end it hiked the right of
the well-heeled Indian to purchase foreign currency
in India to acquire assets abroad. India's rich responded
leading to the sharp increase in remittances to finance
the acquisition of such assets.
Significantly, the four heads under which remittance
outflows have increased the most between 2006-07 and
2010-11 are: investment in equity/debt (from $21 million
to $266 million); gifts to close relatives (from $7
million to $243 million); maintenance of close relatives
(from negligible amounts to $255 million); and, purchase
of immovable property (from $9 million to $66 million).
Clearly there is a decision being made here to sell
domestic assets, convert domestic currency into foreign
exchange and hold assets abroad.
Fortunately for India, the global crisis of 2008 curtailed
and then moderated capital inflows and stabilised
India's foreign currency assets at lower levels. If
not the liberalisation in policy may have continued
and the ceiling on outflows relaxed even further.
As a result the outflow surge may have been greater.
This emerging trend could change the perception of
what constitutes a foreign remittance in the vocabulary
of an Indian. As of now, when you speak of remittances
in India, the image conjured is one of the myriad
Indians, skilled and unskilled, working as temporary
migrants and sending home a part of their earnings.
Private transfers, consisting largely of such remittances
amounted to $53 billion in 2010-11. That was more
or less exactly equal to the inflows on account of
exports of software services in that year. Given the
hype surrounding the software industry, it is clear
that the short-run Indian migrant is clearly an unsung
hero in recent Indian development.
Compared to such figures the $1.2 billion of outward
remittances being discussed here is still miniscule.
But the rising Indian appetite to invest abroad could
prove a problem if economic uncertainty increases,
especially uncertainty with regard to the rupee were
to rise. Such uncertainty could trigger capital flight
in a liberalised environment. Even if a tenth of the
top one per cent of Indians enter the category of
households that can mobilise the equivalent of $200,000
a year, the sum involved would be $240 billion. That
is by no means small, even relative to India's $260
billion reserve of foreign currency assets, since
much of that reserve is built with capital that has
the right to exit the country. India's elite may well
choose to economically secede from the country, precipitating
a crisis in the balance of payments.
*
This article was originally published in the Hindu
on 7th April 2012 and is available at
http://www.thehindu.com/opinion/columns/Econo
my_Watch/article3290980.ece
