6559808-Capital-Account-Convertibility

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Yogesh Raut 83 Devendra nerurkar 108 Mohammed Deshmukh 112 Prateek Ganorkar 07 Sanket Nalwad 115 Submitted to:- Prof. Mayur Malviya

What is Convertibility?: 

What is Convertibility?

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Current Account convertibility: refers to currency convertibility required in the case of transactions relating to exchange of goods and services, money transfers and all those transactions that are classified in the current account. CONVERTIBILITY Capital Account convertibility: refers to convertibility required in the transactions of capital flows that are classified under the capital account of the balance of payments.

Difference between capital and current account: 

Difference between capital and current account Capital Account A capital account refers to capital transfers and acquisition or disposal of non-produced, non-financial assets. E.g. purchase/sell of property, ownership in a firm etc. Capital account convertibility allows free movement from local currency into foreign currency and back. Current Account A current account refers to goods and services, income, and current transfers. E.g. export/import of goods and services. Current account convertibility allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans.

Recommendations by Tarapore Committee: 

Recommendations by Tarapore Committee A committee on capital account convertibility was setup by the Reserve Bank of India (RBI) under the chairmanship of former RBI deputy governor S.S. Tarapore to "lay the road map" to capital account convertibility. In 1997, the Tarapore Committee had indicated the preconditions for Capital Account Convertibility. The three crucial preconditions were fiscal consolidation, a mandated inflation target and strengthening of the financial system . The five-member committee has recommended a three-year time frame for complete convertibility by 1999-2000

Asean Crisis : 

Asean Crisis Until 1997, Asia attracted almost half of total capital inflow to developing countries. These economies maintained high interest rates attractive to foreign investors. Received a large inflow of hot money and experienced a dramatic run-up in asset prices. Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced high, 8-12% GDP growth rates in the late 1980s and early 1990s. This achievement was broadly acclaimed by economic institutions including the IMF and World Bank, and was known as part of the asean economic miracle.

Asean Crisis: 

Asean Crisis Started in July 1997 in Thailand Indonesia, South Korea and Thailand most affected Hong Kong, Malaysia, Laos and Philippines had second level effect All these known as asean Tigers

CAC (Capital Account Convertibility) for Indian Economy : 

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. In fact, the authorities officially involved with CAC (Capital Account Convertibility) for Indian Economy encourage all companies, commercial entities and individual countrymen for investments, and real estate transactions in India as well as abroad. It also allows the people and companies not only to convert one currency to the other, but also free cross-border movement of those currencies, without the interventions of the law of the country concerned CAC 8

Benefits and drawbacks of CAC: : 

Benefits and drawbacks of CAC: CAC is concerned about the ownership changes in domestic or foreign financial assets and liabilities. It also represents the formation and liquidation of financial claims on or by the remaining world. It enables relaxation of the Capital Account, which is under tremendous pressure from the commercial sectors of India. 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 investments. In fact, the CAC policy in India is pursued primarily to gain the speculator's and the punter's confidences in the stock markets. However, CAC does not serve the purposes of the real sectors of Indian economy, like eradication of poverty, escalation of the employment rates and other inequalities. CAC 9

Why Capital Account Convertability ?: 

Why Capital Account Convertability ? To attract foreign investors: It helps attract foreign investment. It offers foreign investors a lot of comfort as they can re-convert local currency into foreign currency anytime they want to and take their money away . Allows domastic company into foreign mkt : capital account convertibility makes it easier for domestic companies to tap foreign markets. so that good amount of foreign exchange can be brought back to the country . Improvement opportunities in private sector: Govt can bring more improvements & opportunities in private sector so more people will get advantage of that. it increases employment opportunities, improves there standard of leaving.

Contd….: 

Contd…. 4. For individual investment: An Indian resident is now allowed to invest upto 2 lakh dollars abroad under the automatic route, which means one can do these transactions straightaway through his / her Indian banker(s).This includes shares and units of mutual funds abroad.

Conclusion: 

Conclusion 1. First, India needs huge resources, especially to upgrade its infrastructure. Domestic savings alone are not enough. More (net) foreign funds would come in only if they are sure of free entry and exit. 2. Second, unhindered access to foreign funds would facilitate Indian companies taking over firms abroad and developing more Indian MNCs in the process. 3. Third, Indian businesses (especially, the established companies) would be able to access cheaper foreign funds that would improve their international cost competitiveness.