{"id":38435,"date":"2025-03-04T18:38:13","date_gmt":"2025-03-04T13:08:13","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=38435"},"modified":"2025-03-04T18:38:14","modified_gmt":"2025-03-04T13:08:14","slug":"capital-account-convertibility","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/04-03-2025\/capital-account-convertibility","title":{"rendered":"Capital Account Convertibility"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/ Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The Chairman of the 16th Finance Commission, Arvind Panagariya, said that India should not rush into full capital account convertibility at its current per capita income level.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Capital Account Convertibility (CAC)<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Capital account convertibility refers to <strong>converting local financial assets into foreign ones<\/strong> freely and vice versa without restrictions.\u00a0<\/li>\n\n\n\n<li>It allows unrestricted capital movement for foreign investments, asset purchases, and remittances.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Current Status of Capital Account Convertibility<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>India follows a <strong>partial capital account convertibility regime.<\/strong>\u00a0<\/li>\n\n\n\n<li>While <strong>current account transactions (such as trade in goods and services) are fully convertible<\/strong>, capital account transactions are regulated.\u00a0<\/li>\n\n\n\n<li><strong>Key aspects<\/strong> of India&#8217;s capital account framework include;\n<ul class=\"wp-block-list\">\n<li><strong>Foreign Direct Investment (FDI)<\/strong> is largely liberalized but still subject to sectoral caps and government approvals in sensitive areas.<\/li>\n\n\n\n<li><strong>Foreign Portfolio Investment (FPI)<\/strong> is permitted with restrictions on ownership limits in certain sectors.<\/li>\n\n\n\n<li><strong>Outward investments <\/strong>by Indian residents are allowed but within prescribed limits under the <strong>Liberalized Remittance Scheme (LRS).<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Advantages of Full CAC<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Greater Capital Inflows: <\/strong>Free capital movement attracts more foreign investments, boosting economic growth and infrastructure development.<\/li>\n\n\n\n<li><strong>Integration with Global Markets:<\/strong> Increased financial integration enhances India&#8217;s competitiveness and access to international financial markets.<\/li>\n\n\n\n<li><strong>Improved Credit Rating:<\/strong> A more open capital account can signal economic maturity and stability, enhancing investor confidence.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Challenges of Full CAC<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Macroeconomic Instability:<\/strong> Unrestricted capital flows can lead to excessive volatility in exchange rates and inflation, affecting economic stability.<\/li>\n\n\n\n<li><strong>Risk of Capital Flight:<\/strong> In times of economic uncertainty, rapid outflows of capital could destabilize financial markets and drain foreign exchange reserves.<\/li>\n\n\n\n<li><strong>Exposure to External Shocks:<\/strong> Open capital accounts make an economy vulnerable to global financial crises and sudden capital reversals.<\/li>\n\n\n\n<li><strong>Banking Sector Vulnerabilities:<\/strong> A fully convertible capital account requires a strong financial system capable of handling external shocks without excessive government intervention.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Tarapore Committee Recommendations<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Fiscal consolidation:<\/strong> Maintain fiscal deficit around <strong>3-3.5% of GDP<\/strong> for macroeconomic stability.<\/li>\n\n\n\n<li><strong>Monetary Policy Objectives: <\/strong>Align inflation rates to global levels and ensure interest rates reflect inflation differentials.<\/li>\n\n\n\n<li><strong>Institutional Strengthening: <\/strong>Enhance monetary policy framework for better decision-making.<\/li>\n\n\n\n<li><strong>Banking System Reforms:<\/strong> Strengthen banks through restructuring, safeguards, and capacity-building for liberalized capital flows.<\/li>\n\n\n\n<li><strong>Adequacy of reserves:<\/strong> With implementation of full CAC, adequacy of reserves would be an important parameter in gauging an economy\u2019s ability to absorb external shocks.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Concluding remarks<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>While capital account convertibility offers potential benefits, India must adopt a pragmatic approach considering its economic conditions.\u00a0<\/li>\n\n\n\n<li>A premature shift to full convertibility could expose the economy to financial instability.\u00a0<\/li>\n\n\n\n<li>A well-calibrated strategy focusing on financial sector reforms, exchange rate stability, and macroeconomic resilience will be essential in determining the right path toward greater capital account openness.<\/li>\n<\/ul>\n\n\n\n<p><strong>Source: <\/strong><a href=\"https:\/\/epaper.thehindu.com\/ccidist-ws\/th\/th_international\/issues\/122130\/OPS\/G1OE1CNSO.1+GFNE2F6VS.1.html\" rel=\"nofollow noopener\" target=\"_blank\"><strong>TH<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Chairman of the 16th Finance Commission, Arvind Panagariya, said that India should not rush into full capital account convertibility at its current per capita income level.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-38435","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/38435","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=38435"}],"version-history":[{"count":2,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/38435\/revisions"}],"predecessor-version":[{"id":38461,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/38435\/revisions\/38461"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=38435"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=38435"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=38435"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}