Moolah and Millionaires Leaving India: Why Now & What’s Wrong

With the headline number of the 5 percent GDP growth in the first quarter looming large in the backdrop, various economic indicators have now started to underline the different facets of the fine print.

Recent data released by the Reserve Bank of India (RBI) on outward remittances by resident Indians under the central bank's liberalised remittance scheme (LRS) highlights the tepid sentiment around viewing India as an investment option.

In July this year, at $1.69 billion, India witnessed its highest ever monthly outflow under the LRS.

If that comes across as just another number, consider a more staggering comparison.

Since NDA-I under PM Modi came to power in 2014, the aggregate outflow of money under the LRS scheme has so far amounted to over $45 billion, as compared to $5.45 billion during the 2009-14 period under the UPA-II government.

The outflow has seen a steady rise since 2014 and in this financial year, it looks on course to topple the FY19 numbers.

What is Remittance Under LRS?

Under the RBI’s LRS, resident Indians can remit up to $250,000 per year under various heads. Now these remittances may either be:

• Current account transactions like going overseas for employment or studies, maintenance of close relatives, medical treatment etc.

or...

• Capital account transactions such as opening a foreign currency account overseas, purchase of property, investing in mutual funds abroad etc.

Where are Indians Investing Their Outward Remittances?

According to RBI data, in the last five years, as far as remittances are concerned, ‘travel’ amounts to over $14 billion, while over $10 billion was spent for the ‘maintenance of close relatives’. Another $10 billion has been sent for ‘education’, while $4.8 billion has been remitted for ‘gifts’.

Smaller remittance categories include ‘purchase of immovable property’ (over $400 million) and ‘overseas investment in equity and debt’ ($1.9 billion).

Another notable trend, though still a developing one, can be observed under the category called ‘Deposits,’ which refers to the money deposited in foreign currency in overseas banks. 

In the financial year 2018-19, $455.9 million was remitted under 'Deposits,' which works out to a monthly average of $38 million. However, in the first three months of this financial year, the average has shot up to $45.73 million – a jump of over 20 percent.

Not Just Moolah, Even Millionaires Are Leaving the Country

Compounding the problem of outflows from India is the fact that millionaires are migrating from the country by the hordes, and especially so, since 2014.

According to data compiled by a team headed by Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management in 2018, as many as 23,000 dollar-millionaires have left the country since 2014. The number amounts to 2.1 percent of India's ultra-rich, as compared with 1.3 percent for France and 1.1 percent for China.

A more recent study – the Global Wealth Migration Review (GWMR) 2019 by AfrAsia Bank and research firm New World Wealth – suggests that at nearly 5,000 millionaires, India saw the third-highest outflow of wealthy individuals last year.

Only China and Russia are ahead of India on the list.

...And Then There are FPIs

Besides Indians and their money taking the flight, now foreign portfolio investors (FPIs) have also turned their back on the Indian markets.

As recently as in July this year, overseas investors pulled out a net Rs 3,758 crore from India – the highest among emerging markets of the world. The outflow was spurred by the increased surcharge on FPIs that was announced in the Budget and has now been rolled back.

The trend, however, continued in August too.

Concerns and Questions

There are more than one facets of the downside of money flowing out of India. Here is a look at some of them:

The Investments That Could Have Been

The outflow of money suggests that the cash-rich are not viewing India as an investment haven. Had the money stayed in India, the investments could have had a multiplier effect in terms of spurring growth and creation of jobs. 

What About Ease of Doing Business?

The flight of money also poses questions for the government’s much touted ‘Ease of Doing Business’ pitch. Experts suggest that the hike in tax rate from 35 percent to 43 percent, for those in the highest tax bracket, is leading them to shift their bases.

Taxes That Could Have Been Earned

With High Net Worth Individuals (HNWIs) migrating out of India with their money, the government’s coffers are missing out on the taxes it could have earned on their income.

The Scare for the Rupee

Outflow of money from a country also leads to weakening of the domestic currency. The flight of capital from India, thus threatens to make Rupee volatile against the US dollar. At a time when crude oil prices are rising at an alarming rate, this could prove to be a double whammy in the immediate future.