The Dollar Drain

[golmaal govindam]

[url="http://www.thehindu.com/opinion/columns/Economy_Watch/article3290980.ece"]http://www.thehindu.com/opinion/columns/Economy_Watch/article3290980.ece[/url]

[img]http://www.thehindu.com/multimedia/dynamic/01046/EW_72_120408_Dolla_1046675f.jpg[/img]

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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 core) 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.[/font][/color][color=#3B3A39][font=Georgia,]
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.[/font][/color][color=#3B3A39][font=Georgia,]
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.[/font][/color][color=#3B3A39][font=Georgia,]
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.[/font][/color]

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