Kalidas Style: The Axe of FCRA

It is a clear case of borrowing dollars on interest while denying dollars coming free.

Independent Ink Editorial

The recent jubiliation over India attracting 136 billion USD through The Foreign Currency Non-Resident (Bank) deposit scheme (FCNR-B) seems justified on the face-value. India badly needs inflow of dollars to halt a mounting current account deficit (CAD), as the Indian Rupee has been steadily losing ground to the dollar over the last decade, especially post-COVID. Some experts argue that this deficit is the highest since 1987, when India faced a balance of payments (BoP) crisis and was forced to enact the policies of liberalisation, globalisation and privatisation. Therefore, the huge forex inflow under FCNR-B is welcome, as it might prevent recurrence of such a CAD and BoP crisis, as well as potentially save the further fall of the Rupee against the dollar.

Will it?

This was the question that critics were asking throughout August, 2026, as they were worried that borrowing dollars against interest is a temporary relief at best and a slippery slope at worst. As India as to payback all of it with interest sooner or later, the total forex outflow will exceed the inflow by the amount of interest paid. Our exports haven’t increased over and above the devalued rupee for the last several years, so how does the govt expect to reverse the increasing CAD while stemming further slide of the Rupee?

However, SBI Research provided arguments to continue to celebrate the FCNR-B, calling its critics an ‘august school of naysayers’, even before the season of ‘Naraaz phoopha’ ended. The scheme could generate a notional profit of around Rs 5 trillion (Rs 5 lakh crore) for banks over five years, and to RBI another Rs 0.5 trillion (Rs 50,000 crore), SBI Research predicted. This could come by way of reinvesting these borrowed dollars that would earn higher yields in the global markets than the interests paid, thus boosting overall forex income while improving liquidity.

"Even though the regulator took a wise decision to curtail the scheme preponing its closure, the mammoth fund flows eclipsed the frontier calculations, with the needle immediately shifting to the cost(s) architecture as being pushed by the lobby of naysayers," said the Report. This narrative was widely reported in the Godi media.

No one seems to ask why such a fantastic scheme needs a premature closure.

This is the moot question. 

There is no denying that we desperately need dollars to prevent CAD and BoP, but that ought to have been achieved by policies that boost exports and curtail imports. If we set aside international factors outside our control, the current situation was largely due to our imports increasingly exceeding our exports, including the imported components within the exported goods. This is inspite of the government slogans of ‘Make in India’ and ‘atmanirbharta’, even if they were rebranded versions the erstwhile Congress slogans of ‘Made in India’ and ‘self-reliance’, as most other government schemes are.

For the record, close to half of all our manufacturing and exports come from the small and medium enterprises, which suffered the worst blows from government policies of demonetisation and GST transition, thus affecting their exports. None of the later policies seem to have firmly put them on the growth path subsequently, to overcome global economic shocks such as COVID-19 and regional wars.

There was another significant source of forex to India in the form of grants-in-aid to various non-governmental organisations (NGOs), which did not have any interest to pay, but nevertheless contributed modestly to the forex liquidity. Annual foreign contributions through this route were Rs. 17,832 crore in 2015-16, according to the data provided by the Union Home Ministry recently to the Joint Parliamentary Committee (JPC). The JPC is examining a bill to revise the Foreign Contribution Regulation Act (FCRA). 

However, this government severely curtailed it through the FCRA, by cancelling the registrations of thousands of NGOs. While some were registered anew or renewed, the total FCRA-registered NGOs fell by half, while the forex inflow modestly increased to Rs. 22,974 crore in 2024-25 over a decade, according to home ministry data.

The government extended the purview of FCRA to even universities and research institutes receiving foreign funds for higher education and research. But it had to retract the provision amidst furore from central universities, IITs and several national research institutes that faced freezing of forex fund inflows under international projects in competitive or collaborative mode.

However, some overzealous universities seem to apply FCRA provisions even to faculty members undertaking professional travel for conferences, workshops, collaborations etc., if it involved any foreign funding in cash or kind, such as registration waiver, flight ticket or hospitality.

The amount of unencumbered forex flow into India through the NGO route that was affected by the cancelled FCRA is not exactly known, but could be very significant. As USA was the largest foreign contributor, US dollars constituted the single largest denomination in which forex flowed to NGOs in India.

According to SBI Research, the interest various banks pay to the depositors under FCNR(B) scheme is around 6 to 6.5%, whereas reinvesting the borrowed amounts in the global markets at current yields could earn 7.5 to 8 %. Assuming such yields can be realized in an uncertain global economic environment, this would amount to nett earnings of 1 to 1.5% over the borrowed dollars after paying their interest. On an amount of $ 136 billion, such a nett income would be between Rs 13,600 crores to 20,400 crores.

This predicted forex income on a one-time FCNR investment is far lesser than the actual annual inflow of dollar-dominated funds to NGOs, year after year, without even accounting for the loss of such inflow due to FCRA cancellations of NGOs. Even if some of them were involved in activities that are not pleasant in the eyes of the government, did any of them indulge in any proven punishable criminal activity?

If not, did the government shoot itself in the foot by attacking NGOs that were bringing forex (free, without interest) into the country, only to end up borrowing similar (nett) amounts through FCNR desposits?

The JPC may examine this angle in depth.