Indian citizens continue to remit substantial sums overseas under the Liberalised Remittance Scheme (LRS), despite a sharp increase in the incidence of Tax Collection at Source (TCS) from October last year. Data from the Reserve Bank of India (RBI) show that LRS payouts increased to $27 billion in the April-January period of FY24 from $22 billion in the same period last year. Though monthly LRS transactions did dip from $3.4 billion in September to $1.8 billion in November, they climbed back to $2.6 billion by January 2024.

Overseas remittances display seasonal swings; historically, they’ve spiked in the July-September period. Last year, the Centre imposed a 20 per cent TCS on all LRS transactions except for those incurred on education and for medical purposes, with effect from October 1, 2023. Transactions up to a threshold of ₹7 lakh were exempted from the levy. Rather than experiment with other policy/tax measures to stem this outflow of dollars or fret over it, policymakers would do well to make peace with surging LRS flows. There are three good reasons why India may not need to worry too much about these outflows at this juncture. For one, most Indians avail of the LRS limits to travel abroad — over 54 per cent of LRS payments in April-January FY24 was for overseas travel — which reflects positive trends in the economy.

These expenses, which have surged post-Covid, reflect aspirational spending by India’s affluent population which is unlikely to give up its yen for foreign travel anytime soon. Also, cross-border travel by executives of software firms and multinationals is an inevitable offshoot of the success story crafted by India in technology and services exports in recent years. Two, the second biggest contributor to LRS payouts, at 25 per cent, is the funding of education and maintenance of close relatives (mainly students) abroad. Investments by Indian families in foreign degrees for their wards do lead to an outflow of dollars in the initial years. But these investments in education often yield long-term payoffs in the form of youngsters sending money back to their families in India, once they find employment abroad. This phenomenon has been a big reason behind remittances into India from countries such as the US growing steadily in recent years. Of the over $120 billion of inbound remittances in 2023, the US and UK contributed over a fourth.

Finally, while LRS outflows are a worry when the balance of payments situation is adverse, the country is quite well-placed now. With the TINA factor working in its favour, India has seen a $40 billion influx of foreign portfolio investments into its debt and equity markets in FY24. This is creating an embarrassment of dollar riches for the central bank, which needs to sterilise these flows to prevent disorderly gains in the rupee. The RBI is now sitting on record foreign exchange reserves of over $642 billion. LRS outflows can help partly balance the influx of dollars.

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