The liberalized remittance scheme allows foreign exchange spending up to USD 250,000 per year. LRS is useful for individuals desirous of undertaking foreign travel and maintenance of relatives overseas, including investment, education, and medical treatment. It has allowed thousands of Indians to avail education, healthcare, tourism, and the purchase of foreign assets.
Before commenting on the desirability of this move, we must understand why the government had to implement the restrictive move. Even though India’s foreign exchange reserve situation is formidable, USD 596.098 billion for the week ended June 16, 2023, it did decline from its peak of USD 642 billion recorded in October 2021. The most pressing reason seems to have been driven by the increasing deficit in the Balance of Payments (BOP) caused by foreign travel. A glimpse of India’s travel account of BOP provides important clues.
India used to be net positive in the travel account of BOP prior to the pandemic. These spends are driven by overseas tours vis-a-vis foreign individuals travelling to India for various purposes. In 2016-17, India received USD 23.244 billion from foreign travellers whereas Indian travellers abroad spent USD 16.451 billion leaving a surplus of USD 6.792 billion (Figure).
Since 2020-21, marked by deadly Covid-19 waves and lockdowns, both receipts and payments have fallen but the decline in receipts has been much sharper even though the outflow on account of Indian spending abroad reduced. This has turned the net balance to negative at USD 3.024 billion in 2020-21. However, the recovery is yet to happen in the inflow in the subsequent years. However, Indians travelling abroad have recovered noticeably leading to an increase in the deficit for the country. The tax on foreign spending is a measure to disincentivize citizens to spend less on foreign travel.
The increase in foreign travel is not surprising as there could be both revenge travel. With an increase in per capita income, demand for foreign travel comes naturally. In 2019, 25.2 million Indians made foreign visits for different purposes. The Indian experience is not unique. China, with higher per capita income than India, experienced even higher tourist outflows than India in the same year (155 million in 2019).
On the other hand, foreign tourist inflows into India stood at 10.89 million in 2019 (Figure). The decline in foreign tourist arrival is yet to catch up with the pre-pandemic levels. However, the lacklustre inflow of foreign tourists after the pandemic is a cause for concern. Even though the rupee depreciated during 2022 the inflow of foreign tourists was below its peak. Therefore, understanding the causes of higher foreign travel by Indians and lesser foreign tourists travelling to India is crucial to address the issue.
Establishing India as an international tourism destination is key. Even in the education sector, the number of Indian students travelling abroad continues to rise above the pre-pandemic levels (approx. 650 thousand in 2022). At the same time, the number of foreign students studying in Indian universities and institutions of higher learning remains substantially lower (48 thousand in 2020-21; 334 thousand between 2016 and 2021) which needs to increase substantially.
Scaling up the Study India program needs immediate attention involving both public and private institutions and universities. Similarly, investment in tourism infrastructure at par with global standards needs emphasis. With the improving economic position of the country, more outflow of Indian tourists is expected. To reverse the trend, investing in education and research, infrastructure, positive image-building exercises, and creating an international tourist-friendly ecosystem need emphasis.
The decision to impose a tax on outward remittances has implications. The proposed tax will have a similar effect as the depreciation of the rupee by the equivalent percent. Instead of relying on the market to discipline foreign exchange spending, the government is taking control of the situation. This will have implications on the convertibility of currency, which is an essential parameter for an internationalizing currency.
The tax might be a temporary palliative but immediate attention is needed to address the root cause of net outflow, be it in the education sector or in the tourism sector, to restore balance in India’s travel account. The key lies in strengthening domestic higher education, healthcare, and tourism sectors. The travel account is a two-way traffic and this big picture must be kept in mind.
This column has been written by Neelam Rani, Associate Professor of Finance, IIM Shillong and Khanindra Ch. Das, Assistant Professor of Economics, BIMTECH, Delhi-NCR.
Disclaimer: The views expressed in this article are that of the respective authors. The facts and opinions expressed here do not reflect the views of www.financialexpress.com.