GS Paper III

News Excerpt:

Outward remittances under the Reserve Bank of India's (RBI) Liberalised Remittance Scheme (LRS) in the April-September quarters of 2023-24 have overtaken those in the corresponding year-ago period.

Key Points:

• Outward remittances under this scheme rose by 26.09 percent to $9.23 billion in the second quarter (Q2) of 2023-24 (FY24) from $7.32 billion in the second quarter (Q2) of 2022-23 (FY23), according to figures released by the RBI in its monthly bulletin for September.
• Indians remitted $3.50 billion overseas in September 2023, up from $2.67 billion in September 2022.
• According to RBI data, overseas remittances by Indians for the maintenance of close relatives increased by 23.30 percent in the quarter under review, to $1.22 billion from $989.89 million. In contrast, for gifts, it increased to $886.55 million from $681.37 million.
• International travel, which accounted for roughly 57 percent of total outgoing Indian remittances under the scheme, increased 34.38 percent yearly (Y-o-Y) to $5.22 billion, up from $3.89 billion in FY23.
• The remittances for the purchase of immovable property expanded by nearly 56.53 percent to $60.31 million under review from $38.53 million in the year-ago period. 
• At the same time, investments in the equity and debt market saw a 90 percent Y-o-Y increase to $360.59 million from $189.78 million.

Dropped sector:

• On the other hand, remittances for other activities dropped by 24.72 percent Y-o-Y to $88.09 million from $117.01 million in the April-September quarters of 2021-22. 
• Similarly, the amount set aside for medical treatment has dropped to $13.48 million. Remittances for studies abroad dropped to $1.15 billion.

Reason For increase:

• Tax Change: The surge in outward remittances is likely due to the change in the LRS tax scheme, which is expected to come into force from October 1. 
• During the Fiscal Year 23 Union Budget, the government proposed increasing the tax collected at source on liberalised overseas remittances from 5% to 20% for amounts above Rs 7 lakh for all purposes except education and medical treatment. 
• The revision was supposed to go into effect on July 1, but the Ministry of Finance delayed it until October 1, 2023.
• Capital Inflow: This has resulted in a sharp increase in equity and debt investment and the purchase of immovable property.
• Growth in international travel: International travel increased by 34.38 per cent year-on-year, leading to increased remittance. 

Conclusion: 

The Liberalised Remittance Scheme has made remittance transfer easy with transparency, which led to an increase in India's foreign exchange reserve.