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Inward Remittances to Rescue Flagging Indian Economy

Updated on Sep 24, 2019
Remittance and economy

What is Remittance?

Remittance is the sum of money sent by a foreign worker to an individual in their home country. Remittances play an important role in the economy of many developing countries like the Philippines, Nepal, Bangladesh, etc. 

Remittance and the Indian Economy

Increased inward remittance is a boon for the economy at both macro and micro levels. At the macro level, remittances contribute to maintaining stable foreign reserves. Remittances help Indian Rupee hold its value against the US dollar and forms a significant part of the GDP. On a micro level, remittances have shown a positive impact on healthcare, entrepreneurship, education, and overall economic development of the recipient families.

As an NRI, you may be impacted by the new NRI tax laws in India. Speak with a legal professional to have all your bases covered.

An increase in outward remittances however, raises an alarm. It causes the rupee to weaken against the dollar, which in return impacts the businesses exposed to foreign exchange, and the economy overall. Recently, the Indian government made amendments like exemption of tax for foreign investors to reverse the flow of outward remittances. CompareRemit discusses the best remittance options when the rupee fluctuates.

Which Form of Remittances Help a Country's Economy?

There are two types of remittances: Inward Remittance and Outward Remittance.

Inward Remittance

Inward remittance refers to the money sent by Indian expats residing abroad to their near and dear ones in India. As per the World Bank report, the Indian diaspora sent a whopping USD 79 billion back home in 2018, making India the world's top recipient of remittances. At the growth rate of 14% in inward remittance, India has registered significant growth in the flow of remittances over the last 3 years. From USD 62.7 billion in 2016 to USD 65.3 billion in 2017, remittances reached the 79 billion mark by 2018.

Outward Remittance

Outward remittances refer to money sent overseas by residents of India for specific purposes. An outward remittance can be made in many ways. Authorized dealers and many banks in India like SBI, PNB, Bank of Baroda, Axis Bank, ICICI Bank, etc. offer these services.

Between 2009 and 2014 the aggregate outward remittance under the Liberalized Remittance Scheme (LRS) amounted to USD 5.45 billion. According to a report by the Reserve Bank of India, India witnessed the highest ever monthly outflow of USD 1.69 billion under LRS by resident Indians in the month of July 2019.

Liberalized Remittance Scheme

Under the RBI's Liberalized Remittance Scheme, resident individuals are allowed to remit up to USD 250,000 per financial year. This could be under various categories involving current account transactions including going overseas on employment, studies overseas, emigration, maintenance of close relatives, and medical treatment.

Capital account transactions can also be made by residents under LRS including the opening of foreign currency account overseas with a Bank, making investments in units of mutual funds, purchase of property, venture capital funds, etc.

The outflow of money under the LRS scheme has hit USD 5.8 billion in the first four months of this financial year with an aggregated amount of over USD 45 billion. The sharp rise in the outflow of funds under the LRS scheme indicates the following key highlights:

1. The flight of capital of small and mid-size businessmen from India. Various

publications cited setting up shops in countries like Dubai with friendly tax laws as the reason for the capital movement.

2. Weak private investment climate and a declining GDP growth rate are hurting the sentiments of investors.

3. The increase in taxation rate from 35% to 43% for the highest tax bracket is also a trigger for the 2.1% of India’s rich leaving the country.

According to the World Economic Forum, an estimated 258 million people are currently living outside their country of origin. The volume of remittance will fluctuate but will continue to play a significant role in the economy of the country and the lives of the people.

Follow us on Twitter @CompareRemit for more updates.

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