Capital Account Convertibility in India
“FULLER” CAPITAL ACCOUNT CONVERTIBILITY A boon or a bane!
Abstract
This is the era of competitive economies and India is one of the pioneers. In the recent years, India has been consistently moving towards becoming a developed nation with its IT and technical advancement, intellectual capital, off shoring and outsourcing to boast of. Capital account convertibility is one of the main features of developed economy. India’s inclination towards CAC, when the Tarapore committee first suggested it in 1997 and after their latest report in 2006, indicates that it is aiming to cash on this opportunity to realize the potential of the economy to the maximum possible extent. Fuller Capital Account Convertibility implies the freedom to convert domestic financial assets into overseas financial assets and vice-versa co-exists with reforms, restrictions and regulatory measures. Thus FCAC brings what is most required today in India-cheaper capital to accelerate the pace of investment, diversification of investment to reduce risk and integration with the global markets alongwith the urgency for strengthening the macroeconomic framework. In this paper, we have studied the prerequisites for implementing FCAC, India’s position and efforts so far, the Asian crisis and lessons learnt from it, and finally, would it be worth taking the risk!
INTRODUCTION
In India, the foreign exchange transactions (transactions in dollars, yen, or any other currency) are broadly classified into two accounts: current account transactions and capital account transactions. If an Indian citizen needs foreign exchange of smaller amounts, say $3,000, for traveling abroad or for educational purposes, she/he can obtain the same from a bank or a moneychanger. This is a current account transaction. But, if someone wants to import plant and machinery or invest abroad, and needs a large amount of foreign exchange, say $1 million, the importer will have to first obtain the permission of the Reserve Bank
Abstract
This is the era of competitive economies and India is one of the pioneers. In the recent years, India has been consistently moving towards becoming a developed nation with its IT and technical advancement, intellectual capital, off shoring and outsourcing to boast of. Capital account convertibility is one of the main features of developed economy. India’s inclination towards CAC, when the Tarapore committee first suggested it in 1997 and after their latest report in 2006, indicates that it is aiming to cash on this opportunity to realize the potential of the economy to the maximum possible extent. Fuller Capital Account Convertibility implies the freedom to convert domestic financial assets into overseas financial assets and vice-versa co-exists with reforms, restrictions and regulatory measures. Thus FCAC brings what is most required today in India-cheaper capital to accelerate the pace of investment, diversification of investment to reduce risk and integration with the global markets alongwith the urgency for strengthening the macroeconomic framework. In this paper, we have studied the prerequisites for implementing FCAC, India’s position and efforts so far, the Asian crisis and lessons learnt from it, and finally, would it be worth taking the risk!
INTRODUCTION
In India, the foreign exchange transactions (transactions in dollars, yen, or any other currency) are broadly classified into two accounts: current account transactions and capital account transactions. If an Indian citizen needs foreign exchange of smaller amounts, say $3,000, for traveling abroad or for educational purposes, she/he can obtain the same from a bank or a moneychanger. This is a current account transaction. But, if someone wants to import plant and machinery or invest abroad, and needs a large amount of foreign exchange, say $1 million, the importer will have to first obtain the permission of the Reserve Bank
References: • Shaveta Gupta, Full Capital Account Convertibility-India’s Dilemma, ICFAI journal, Treasury Management, September 2006 • G.S. Batra, Management of financial institutions and markets, Deep & Deep publications, 1996. • K.K.Dewitt, Modern economic theory, S.Chand publications pvt.ltd, 1987 • M.C. Vaish, Macroeconomic theory, Vikas publishing house Ltd. 12th revised edition 2002. • Tarapore committee report on Fuller capital Account Convertibility, www.rbi.org.in • Ila Patnaik, Holy Grail, www.mecklai.com • Articles on FCAC- Issues on Set 2nd, 4th, 8th, and 18th, www.economictimes.indiatimes.com • Article on FCAC- Issue on Sept 2nd, www.timesofindia.indiatimes.com • www.imf.org • www.thehindubusinessline.com