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Understanding Capital Account Convertibility in India

The document discusses Capital Account Convertibility (CAC) for the Indian economy. CAC refers to abolishing restrictions on capital movement between India and other countries. The Tarapore Committee recommended full rupee convertibility by 1999-2000 if inflation was 3-5% and the fiscal deficit fell to 3.5% of GDP. India adopted current account convertibility in 1994 under IMF rules. CAC was intended to make capital markets independent and exert less pressure on India's financial system. However, CAC does not address issues like poverty eradication and employment and financial crises can still exist with CAC.

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15 views2 pages

Understanding Capital Account Convertibility in India

The document discusses Capital Account Convertibility (CAC) for the Indian economy. CAC refers to abolishing restrictions on capital movement between India and other countries. The Tarapore Committee recommended full rupee convertibility by 1999-2000 if inflation was 3-5% and the fiscal deficit fell to 3.5% of GDP. India adopted current account convertibility in 1994 under IMF rules. CAC was intended to make capital markets independent and exert less pressure on India's financial system. However, CAC does not address issues like poverty eradication and employment and financial crises can still exist with CAC.

Uploaded by

Khushnud Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

CAC (Capital Account Convertibility) for Indian Economy -

 It refers to the abolition of all limitations with respect to the movement of


capital from India to different countries across the globe.

 Authorities involved with CAC for Indian Economy encourage all


companies, commercial entities and individual countrymen for
investments, divestments, and real estate transactions in India as well as
abroad.

 It allows free cross-border movement of those currencies, without the


interventions of the law of the country concerned.

The Tarapore Committee appointed by the Reserve Bank of India (RBI) was
meant for recommending methods of converting the Indian Rupee completely.

Pre-requisites for Capital Account Convertibility in India:

The report submitted by this Committee in the year 1997 proposed a three-year
time period (1999-2000) for total conversion of Rupee. However, according to
the Committee, this was possible only when the following few conditions are
satisfied:

1> The average rate of inflation should vary between 3% to 5% during the
debt-servicing time.

2> Decreasing the gross fiscal deficit to the GDP ratio by 3.5% in 1999-2000

Evolution of CAC in India economic :

 Indian economy adopted the present form of Current Account


Convertibility in 1994 August .

 It was compelled by the International Monetary Fund (IMF) Article No. VII,
the article of agreement.

 The primary objective behind the adoption of CAC in India was to make
the movement of capital and the capital market independent and open.

 This would exert less pressure on the Indian financial market. The
proposal for the introduction of CAC was present in the recommendations
suggested by the Tarapore Committee appointed by the Reserve Bank of
India.

Reasons for the introduction of CAC in India -

 To ensure total financial mobility in the country.


 Also to help in the efficient appropriation or distribution of international
capital in India.

Forecasts made by the Tarapore Committee -

1> A prescribed average inflation rate of 3% to 5% will exist for a three-year


time period, from1997-98 and 1999-2000.

2> The non-performing assets will experience a decline to 12%, 9% and 5%


by the years 1997-98, 1998-99 and 1999-2000 respectively, with respect
to the total or aggregate advances.

3> By the years 1997-98, there will be a complete deregulation of the


structure of interest rate.

4> The gross fiscal deficit will fall from 4.5% in 1997-98 to 4.0% in 1998-99
and further to 3.5 % in 1999-2000, with respect to the GDP.

Benefits of CAC:

1> CAC is concerned about the ownership changes in domestic or foreign


financial assets and liabilities.

2> It enables relaxation of the Capital Account, which is under tremendous


pressure from the commercial sectors of India.

3> Along with the financial capitalists, the reputed commercial firms in India
jointly derive and enjoy the benefits of the CAC policy, which speculate the
stock markets through nvestments.

Drawbacks of CAC :

1> It does not serve the purposes of the real sectors of Indian economy, like
eradication of poverty, escalation of the employment rates and other
inequalities.

2> In spite of CAC being present in Indian economy, there will be a co-
existence of financial crises.

So Despite several benefits, CAC has proved to be insufficient in solving


the Indian financial crises, the complete solution of which lies in
having a regulated inflow of capital into the economy.

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