Union Budget 2013
23 Feb 2013
Budget For NRIs Too
To mobilise resources from NRIs, a special dollar-denominated investment option may help, says CII's Chandrajit Banerjee
It is pertinent to recall the contribution that NRIs make to the Indian growth story. Over the last decade, NRI deposits have more than doubled from $25.2 billion in 2001-02 to $58.6 billion in 2011-12. Remittances from Indians living and working overseas, under the head of ‘private transfers’, surged to $66.3 billion in 2011-12, from $15.8 billion just ten years ago. This pertains to both household expenses as well as investments. Such a large inflow helps stabilize India’s current account deficit, augment foreign exchange reserves and strengthen the rupee. Budget proposals thus have major ramifications for the NRI and PIO community, impacting their financial planning, remittances and investments in India. Also, measures to attract higher investments from overseas Indians can add to funds for promoting inclusive growth. The Union Budget must therefore be formulated keeping their expectations in mind for reigniting growth in the economy.
Higher investment from NRIs
A significant portion of the NRI community is well placed, financially and socially, enabling it to be active in investments in India. It is well-known that the overseas Chinese community was largely responsible for funding investments in mainland China once its economy opened up. A similar role can be envisaged for India’s overseas community.
The basic demographics of various overseas Indians groups are different on many measures. For example, Indian Americans lead all other groups by a significant margin in their levels of income and education. Seven-in-ten Indian-American adults aged 25 and older have a college degree, compared with about half of Americans of Korean, Chinese, Filipino and Japanese ancestry, according to Pew Research.
Many of these higher-income groups have ample funds to invest in instruments which are safe and offer good returns. Due the change in the stance of Reserve Bank of India (RBI), Non-Resident External (NRE) deposits have become quite popular with the NRI community, as they offer higher rates of interest. In fact, these rates are higher than what they would get in developed markets. Since the Indian banking sector is well regulated and the rates on NRE deposits are market driven, funds have been deployed into India with positive outcomes for both the country and the community.
To further mobilise resources from NRIs into the country a special dollar-denominated investment option could be contemplated. Besides, there is need to encourage greater participation of NRIs in long term government and corporate bonds.
Infrastructure and power sector reforms are a priority to boost investments and provide a fillip to growth in economy and industry. The contribution of NRIs to this segment could be immense. For this, remittances into infrastructure should be made more attractive. In this context, a deduction of Rs 20,000 was made available till financial year 2011-12 from investment in infrastructure bonds. This clause may be reintroduced in the Budget 2013-14. Besides, exempting interest income on infrastructure bonds from tax, removing withholding tax on ECBs on infrastructure companies, especially power, among others would attract NRI investments in infrastructure.
The macro backdrop of the Budget also calls for the revival of investment cycle. Investment by NRIs holds special significance. In this context, the government needs to be complimented for its recent decision to defer General Anti-Avoidance Rules (GAAR) and non-application of GAAR to FIIs floated by NRIs. However, much more needs to be done to make India an attractive investment destination for NRIs. Some such suggestions include raising FDI in insurance, introducing threshold level for tax deduction at source on payments to NRIs, increasing flexibility for claiming benefits under tax treaty , among others.
Traditional Investment Bets
Real estate has always been popular with the NRI community. With property prices soaring in the country, tax concessions on home loans will help NRIs in buying houses here. Increasing the extant deduction limit of Rs 100,000 under section 80C to Rs 150,000 per person per year, will further stimulate their interest in the real estate market. Such a move will tremendously benefit the thousands of workers in the Gulf region who are living away from their families to support them financially.
However, having said so, it is equally true that real estate transactions are not easy to deal with, especially for NRIs who may find it difficult to overcome the systemic problems in the sector. To mitigate this situation, NRIs are looking for the introduction of the Real Estate Regulatory Reforms Bill in the forthcoming Budget which would protect the interest of the investor by increasing transparency in real estate transactions.
Similarly, as per press note 2, a three year lock-in of capital is stipulated for FDI into real estate. However, there is no clarity as to whether the three year lock-in provision applies to the investment or the investor. The key objective of the lock-in is to ensure that invested funds do not leave India before the expiry of three years. Accordingly, the lock-in should not be applicable to share transfers between two non-residents. This clarification would encourage more FDI including by NRIs into the sector without compromising the key objective of the regulator
The high fiscal deficit has put pressure on government finances and has brought an urgency to augment revenues. In this context, a suggestion doing the rounds is that the so called “super rich” should be taxed subject to a higher tax bracket. We understand that this idea is emanating from the proposals that have gone through in the US as part of the deal to avoid the “fiscal cliff”. Such a move would bring down the net take home income for many white-collar non-resident Indians. A higher tax rate would impact NRIs disproportionately as their earnings are in overseas currencies.
To conclude, the NRI community must be viewed as a critical component of the Indian economy, and all measures should be targeted to increase their participation in India’s inclusive growth mission. This would be immensely beneficial for both sides.
(Chandrajit Banerjee is Co-Chairman, Overseas Indian Facilitation Centre & Director General, CII)