The Hindu Business Line : `A fuller blast ne'er shook our battlements'

Most of us were least prepared for the FCAC when the abbreviation hit us full force a few days ago, after the Tarapore Committee submitted its report. FCAC, as you know, isn't Financial Consumer Agency of Canada or Fuzzy Channel Allocation Controller, as would show on www.acronymfinder.com. Nor is it Farm Credit Assistance Corporation or Favourite Cartoons that Are Chang, showing up on www.acronymattic.com.

FCAC, which may perhaps be pronounced `eff-cak' stands for `fuller capital account convertibility,' a phrase with possible source in what the Prime Minister, Dr Manmohan Singh, said in a speech at the Reserve Bank of India (RBI) on March 18. "Given the changes that have taken place over the last two decades, there is merit in moving towards fuller capital account convertibility within a transparent framework... I will therefore request the Finance Minister and the Reserve Bank to revisit the subject and come out with a roadmap based on current realities," is a snatch from Dr Singh's speech. In retrospect, "a fuller blast ne'er shook our battlements," as in Othello!

Come to think of it, you can't have a fuller CAC when we are yet to reach what can be called full CAC. Which lends credence to the surmise that the word fuller could have been used in the speech with the remotest expectation that it would become part of the jargon juggernaut on Mint Street.

In what may be one of the fastest sequences, two days after the PM's CAC-call, the RBI Governor, Dr Y. V. Reddy, appointed a `Committee to set out the Roadmap Towards Fuller Capital Account Convertibility.' Strangely, however, the `roadmap' turned into `framework' in the communiqué, and both the words got dropped when the title of the report released on September 1 read simply `Report of the Committee on Fuller Capital Account Convertibility.'

Full, fuller, fullest, we know from school days, as much as dull, duller, dullest. An easy comparative, compared to toughies like good, better, best, or worse, the bad series. But the word fuller, were you to mull, means different things. Fuller means `somebody who makes cloth bulkier by dampening and beating it,' and `a hammer used by a blacksmith for forging grooves and spreading hot iron,' according to Encarta. In King Henry VIII you come across `the spinsters, carders, fullers, weavers... '

Buckminster Fuller was an American inventor, best known for geodesic dome. Fuller's earth is `an absorbent clay used in fulling cloth and in filtering liquids' and `fuller's teasel' is `a plant with large prickly flower heads, formerly used to raise the nap on cloth.' Fuller is `a groove in a sword blade that reduces its weight,' as www.hickoksports.com defines in Fencing Glossary. Fuller was not used, as in common folklore, as a `blood channel' so that blood can flow off of the blade, explains Arms & Armour Glossary of Terms on www.chronique.com.

Gory stuff, so we shall return to the 213-page document on www.rbi.org.in. "The path to FCAC is becoming unidirectional towards greater CAC," says the Committee, and goes on to give a `working definition' of CAC as "the freedom to convert local financial assets into foreign financial assets and vice versa." CAC is "associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world."

Sounds enticing, but there are caveats. Such as, that CAC can be, and is, `coexistent with restrictions other than on external payments'. And that FCAC `would not necessarily mean zero capital regulation.' To help you understand, the report offers `the analogy to de jure current account convertibility,' which "recognises that there would be reasonable limits for certain transactions, with `reasonableness' being perceived by the user."

The perceptive would have noticed that the reference is to current and not capital. "While current account convertibility refers to freedom in respect of `payments and transfers for current international transactions,' capital account convertibility (CAC) would mean freedom of currency conversion in relation to capital transactions in terms of inflows and outflows," elaborates the Report. "Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa. Convertibility in that sense is the obverse of controls or restrictions on currency transactions."

The Tarapore Committee set up by the RBI in 1997 to go into the issue of CAC had defined it as `the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange,' narrates www.welcome-nri.com about an earlier exercise. "In simple language... CAC allows anyone to freely move from local currency into foreign currency and back."

How is CAC different from current account convertibility? That's the next question on the site. With current account convertibility, "residents can make and receive trade-related payments — receive dollars (or any other foreign currency) for export of goods and services and pay dollars for import of goods and services, make sundry remittances, access foreign currency for travel, studies abroad, medical treatment and gifts and so on," reads the answer. "In India, current account convertibility was established with the acceptance of the obligations under Article VIII of the IMF's Articles of Agreement in August 1994."

CAC, as a concept in the works, takes convertibility to a higher level by permitting home currency to be freely converted into foreign currencies for acquisition of capital assets abroad, and vice versa. "CAC is widely regarded as one of the hallmarks of a developed economy," notes www.welcome-nri.com. Because CAC acts as `a major comfort factor for overseas investors' by enabling the re-conversion back into foreign currency in case a foreign investor decides to exit from a capital investment.

CAC, or a floating exchange rate, has no discrete definition, frets http://forex.gftforex.com. "General discussion assumes that the phrase signifies the ability to convert from one currency to another without any limit or control. Full convertibility is understood as the condition of being able to make that conversion at market rates."

Economists rarely agree on many things. And CAC is something on which there is a greater probability of divided opinion. For instance, the Left has opposed CAC saying that it would increase the risks of a currency crisis; and that "along with non-residents like the foreign institutional investors, Indian residents would also be able to take large amounts of money out of the economy without any restrictions." More importantly, the FCAC Report from the six-member Committee has voices of dissent from two members.

Despite resistances, it is inevitable that we'd move towards FCAC, as outlined in the five-year roadmap in a calibrated manner, and that could be something fuller, meaning more liberal, than what we have at the present. "The enemy, marching along by them, by them shall make a fuller number up," a line from Julius Caesar, that is, to encourage the supporters of FCAC.

ZeroBase@TheHindu.co.in