This exclusive monthly article series, courtesy of Al Mulla International Exchange Company, is devoted to Indian macroeconomic policies against the backdrop of an increasingly integrated global economy. These articles would be oriented towards addressing the concerns of overseas institutions/individuals with interest in the Indian economy.
By S.S. Tarapore
This month’s column is exclusively devoted to policies, procedures and operations relating to Non-Resident Indians (NRIs) and foreign investors. The central problem is that the intent of policy, which is, invariably based on a sound rationale, gets diluted in the content of policy, which is derailed as it gets entangled in a maze of operational and procedural issues.
Global and Indian Developments
It is over five years since the inception of the global financial crisis and there are, as yet, no strong unequivocal signs of global recovery. Indian policymakers are slowly reconciling to distinctly lower growth rates than prior to 2008. As C.A. Yandle, a New Zealander and retired fiscal expert from the International Monetary Fund (IMF) aptly asks why are economic agents ever so willing to absorb liquid assets i.e. permitting unlimited monetary injections by central banks, without any fears of a crash and a consequent explosive inflation. The pertinent question then is what would happen when economic agents lose confidence in paper currency? Yandle says that one definition of ‘idiocy’ is to repeat doing the same thing and expect different results; this is precisely what the world appears to be doing at the present time with unbridled monetary expansion while expecting growth to recover.
In the early years of the global financial crisis, a view gained currency that the Emerging Market Economies (EMEs) were immune to the global slowdown but over time growth has slowed down in the EMEs. Notwithstanding the massive money creation by central banks, the industrial countries have not experienced inflation while EMEs, particularly India, are experiencing severe inflation. Once inflation catches up in the industrial countries and the inevitable propagation of inflation from industrial to EMEs takes place, what would be the impact on inflation in countries like India?
Key Indicators of Relevance to NRIs and Foreign Investors
It is fashionable, in economic circles, to throw up massive and complex data on economic developments. From the viewpoint of NRIs and foreign investors it is pertinent to focus attention on a few simple indicators:
(i) Indian Inflation: It is best to focus on the Consumer Price Index (CPI) retail inflation which, at the present time, shows a year-on-year increase of 10 percent. Any further acceleration should flash a red light signal and there can be comfort only if there is a significant and enduring reduction to a level around 5 percent.
(ii) Rate Exchange: NRIs and foreign investors must recognize that with the large inflation rate differential between India and the US, sooner or later, the nominal value of the rupee exchange rate vis-a vis the US dollar will have to depreciate, or else India would become uncompetitive in international markets.
(iii) Reserve Money Indicators: Reserve money should not be considered as some esoteric indicator, but of relevance to all economic agents with concerns about the future course of the economy. Reserve money is nothing other than the total money created by the Reserve Bank of India (RBI) and it would suffice to use two indicators:
(a) The NFA/C Ratio: One should relate the Net Foreign Assets (NFA) of the RBI to the Currency. As of March 2013, the NFA/ C ratio was 130 percent. A ratio above 100 percent should be of comfort to investors as it means that the currency is fully backed by foreign exchange and that external inflows are safe.
(b) NFA and NDA: The reserve money creation is either foreign or domestic. As of March 2013, the NFA was Rs 15,581 billion while the Net Domestic Assets (NDA) was a negative Rs 432 billion. In other words, the created money is entirely attributed to NFA.
A rising NDA and a falling NFA should be of great concern to investors. Srinivas Varadarajan of Mount Nathan Capital Management provides an interesting analogy. According to him, NFA is like good cholesterol while NDA is akin to bad cholesterol. NRIs and foreign investors would be well advised to monitor these indicators.
Nature of NRI Forex Flows
NRI flows into India are crucial to the balance of payments position of India, yet NRIs, particularly individuals, face horrendous procedural hassles.
(a) Remittances: Remittances into India now top US $ 71 billion per annum. These remittances are inclusive of technology related remittances, but the fact remains that migrant worker remittances are very sizable. Yet, at the Indian end, inadequate attention is given to the problems faced by NRIs. The Indian diaspora is unbelievably large and remittances are sent to remote areas in the hinterland and it is essential that these remittances reach the final beneficiary without delay. The remittances have a predictable regularity as the remittances are undertaken for monthly family maintenance. While the RBI has undertaken some limited studies, there is a need for a comprehensive survey of these remittances. From the viewpoint of the remitter, what is important is not just the cost of remittance but timeliness. It is not enough to have speedy remittances to the metropolitan and urban areas but expeditious service to the semi-urban and rural areas. Such a study would throw up vital information on areas where remedial action is necessary.
(b) NRI Deposits: The outstanding NRI deposits at the end of March 2013 amounted to US$70.8 billion of which Foreign Currency Non-Resident (Banks) deposits (FCNRB) were US$15.2 billion, Non-Resident
(External) Rupee Accounts (NRERA) deposits amounted to US$ 45.9 billion and Non-Resident Ordinary (NRO) deposits US$ 9.7 billion. Furthermore, in the first half of 2013-14, the net inflows under all these three schemes amounted to US$ 13.8 billion as against US$ 9.4 billion in the first half of the previous year.
When measures are taken to encourage inflows they are undertaken across-the- board. From a viewpoint of equity, it is essential to set out an order of preference. The NRERA deposits have a greater stake in the Indian economy than FCNRB deposits which are motivated more by arbitrage opportunities. In the recent period it is the FCNRB deposits that were provided concessional swap facilities at the RBI. While providing for exemption from reserve requirements on FCNRA/NRERA deposits it would only be fair to provide exemptions to the entire outstanding NRERA deposits rather than only the incremental deposits.
Perverse Effect of Forex liberalization and procedural hassles
With the easing of exchange controls after 1991, there has been a perverse effect as the monolith regulation has given rise to multiple regulators as the powers have devolved from RBI to banks and further with the delegation of powers within each bank. In the upshot the bank customer faces a myriad of regulations which are not standardized. In May 2011, the RBI set up a Committee to review the Forex procedures for individuals both resident and non-resident with Ms. K.J. Udeshi (former Deputy Governor RBI) as Chairman. The Committee submitted its report in August 2011 and a number of procedural hurdles were eased. Nonetheless, there are still a number of unnecessary procedural impediments which need to be remedied.
At times the regulatory framework operates like a ‘moral brigade’. For instance, an individual resident can have a joint bank account with another resident (say an off-spring) and either can operate the account. A resident account holder could, however, not have a non-resident second holder (say an off-spring). After the Udeshi Report a resident was permitted to hold a joint account with a non-resident as a second holder but the second holder (i.e. a non-resident) cannot operate the account in the life time of the resident first holder. In other words, the resident off-spring is considered upright but the non-resident off-spring could dupe the parent. Such moralistic regulations are reflective of the erstwhile draconian Forex regime.
Tax Deduction at Source( TDS)
The TDS provisions for NRIs cannot be observed. For instance, in a transaction where the seller is non-resident and the buyer is resident, the buyer is required to deduct tax at the rate of 30 percent and it is for the NRI to claim a refund. In a screen based trading system the buyer does not know who the seller is.
Ignominy of NRO Accounts
The NRO Accounts originate from bank balances before the resident becomes a non-resident and also includes any inheritances. Each non-resident individual can remit up to US$ One million per annum. The NRO account holder has to have one NRO bank account for assets before leaving India and one separate bank account for any assets acquired after becoming non-resident; likewise the non-resident has to have two separate demat accounts. All this red tape could be cut through and all NRO accounts could be merged and up to US$ One million remittances per annum could be allowed. Better still, all NRO Accounts up to US$ 0ne million per year could be transferred to the NRERA account. It is time the RBI undertakes a comprehensive survey of NRO Accounts and cuts the agony of NRO Account holders. It is surprising that NRO Account holders do not rapidly remit the outstanding balances in these accounts.
Curtailment of Outward remittances under the Liberalized Remittance Scheme (LRS) for Residents
It is well known that when two-way capital flows are liberalized net capital inflows increase. The measure undertaken in August 2013 to curtail individual resident remittances from US$ 200,000 to US$ 75,000 is one of the worst measures taken by the RBI. The total remittances under the LRS, including current account remittances such as gifts , family maintenance, medical etc. amounted to a mere US$1.2 billion The reducing of the ceiling and the prohibition on property acquisition reflects a panic reaction and moreover smacks of the ‘moral brigade‘ being active. Restoring the limit for individual residents to US$ 200,000 would be the best confidence building measure.
Need to Revisit Procedures and Operations
There is an imperative need to replicate the 2011 Udeshi Committee to evaluate the progress since 2011 and to further remove the procedural and operational hurdles for resident and non-resident individuals.
Savak Sohrab Tarapore, B.A. (Honours Economics) Sheffield University (1958), MSc.(Economics) London University (1960) and Doctor of Laws honoris causa, Sheffield University (1996) was a career central banker. He joined the Reserve Bank of India in 1961 as a Research Officer in 1961 and retired as Deputy Governor in 1996.During 1971-79 he was seconded to the International Monetary Fund. Since retirement he has chaired a number of official Committees/Boards and he is a regular columnist in financial newspapers.