CONVERTIBILITY TYPES TARAPORE COMMITTEE

CONVERTIBILITY TYPES TARAPORE COMMITTEE:

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CONVERTIBILITY - means the freedom to convert rupee into any foreign currency (Euro, Dollar, Yen, Renminbi etc.) and foreign currency back into rupee for capital account transactions. In very simple terms it means, Indian’s having the freedom to convert their local financial assets into foreign ones at market determined exchange rate. CAC will lead to a free exchange of currency at a lower rate and an unrestricted movement of capital.

 

Why is Convertibility important?

To attract foreign investment, many developing countries went in for CAC in the 1980s, not realising that free mobility of capital leaves countries open to both sudden and huge inflows and outflows, both of which can be potentially destabilising. More important, unless you have the institutions, particularly financial institutions capable of dealing with such huge flows, countries may not be able to cope as was demonstrated by the East Asian crisis of the late 90s

How is Capital Account Convertibility different from Current Account Convertibility?

Current Account Convertibility allows free inflows and outflows of foreign currency for all purpose including resident Indians buying foreign goods and services (imports), Indians selling foreign goods and services (exports), Indians receiving and sending remittances, accessing foreign currency for travel, study abroad, medical tourism purpose etc.

On the other hand, Capital Account Convertibility is widely regarded as the hallmark of developed countries. It is also seen as the major comfort factor for foreign investors since it allows them to reconvert local currency back into their own currency and move out from India.

Present Situation in India

In India, the Tarapore committee had laid down a three-year road-map, ending 1999-2000, for CAC. It also cautioned that this time-frame could be speeded up, or delayed, depending on the success achieved in establishing the pre-conditions primarily fiscal consolidation, strengthening of the financial system and low rate of inflation. With the exception of the last, the other two preconditions have not been achieved. The Capital Account Convertibility in India will depend on how fast the country meets the preconditions put forward by Tarapore Committee such as fiscal consolidation, inflation control, low level of Non-Performing Assets, low Current account deficit and strengthen financial markets. Sound policies, robust regulatory framework promoting a strong and efficient financial sector, and effective systems and procedures for controlling capital flow greatly enhanced the chances of ensuring that such flows fostered sustainable growth and did not lead to disruption and crisis.

• Current Account Convertibility: Current account is today fully convertible (operationalized on August 19, 1994). It means that the full amount of the foreign exchange required by someone for current purposes will be made available to him at the official exchange rate and there could be an unprohibited outflow of foreign exchange (earlier it was partially convertible). India was obliged to do so as per Article VIII of the IMF which prohibits any exchange restrictions on current international transactions (keep in mind that India was under pre-conditions of the IMF since 1991).