The Hindu Business Line : Pros and cons of convertibility

Rupee convertibility or capital account convertibility is a very simple concept. All it means is that if you take your rupee to a bank or foreign exchange dealer and want to exchange it into another currency, such as the US dollar or the euro, it they should be done exchange the money with no questions asked whatsoever. There should also be no limit on the amount that can be exchanged into another currency as there is now.

Currently there is some amount of rupee convertibility is allowed to some extent in India but not full capital account convertibility. There have been several committees to discuss when and how India can go become fully convertible on the capital account, the latest being the `Committee on Fuller Capital Account Convertibility' under the former RBI Deputy Governor, Mr S. S. Tarapore.

The merits are:

It paves the way for companies to access funds from outside without hindrance.

It makes it far easier for foreign companies to invest in India.

It sends a signal to international investors as well as the financial world that India is confident of itselfherself in the economic and financial arena and has the capability to withstand anything that is thrown at ither.

Since it exposes makes India more exposed to the vagaries of the international financial sector, it forces the government to become more disciplined on the fiscal side of things.

It forces the financial sector to be become more efficient, more disciplined, and much stronger.

The demerits are:

It exposes the country India to the volatility of the world financial system.

The rupee can possibly become more volatile.

That said, there are infinitely more merits than demerits to going becoming convertible on the capital account. The As far as the demerits are concerned, they are only demerits so only as long as the financial system and government accounts are shoddy. If they it become world class financial system, the it can easily manage volatility can be managed without any problem.

Sunil Rongala

Group Economist

Murugappa Group

(Send in your queries on economics to Whackonomic@gmail.com)

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