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With reference to Capital Account Convertibility, consider the following statements:
India has a full convertible capital account policy.
A fully convertible capital account effectively accelerates growth.
Which of the statements given above is /are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'B'. Can you explain this answer?
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With reference to Capital Account Convertibility, consider the follow...
- Statement 1 is not correct: The balance of payments (BOP) of a country records all economic transactions of a country with the rest of the world during a defined period, usually one year. These transactions are broadly divided into two heads – current account and capital account. The current account covers exports and imports of goods and services, factor income, and unilateral transfers. The capital account records the net change in foreign assets and liabilities held by a country. Convertibility refers to the ability to convert domestic currency into foreign currencies and vice versa to make payments for the balance of payments transactions. Current account convertibility is the ability or freedom to convert domestic currency for current account transactions while capital account convertibility is the ability or freedom to convert domestic currency for capital account transactions. The Tarapore Committee (2006), for instance, defined capital account convertibility as the “freedom to convert local financial assets into foreign financial assets and vice versa.” India has a partially convertible capital account policy. This is because an individual or high net-worth investor wanting to invest outside India can invest within an overall limit of $250,000 per financial year under the Liberalised Remittance Scheme for any permitted current or capital account transaction or a combination of both. This means, they can make investments to the tune of up to $500,000 in a calendar year. The scheme, however, is not available to corporates, partnership firms, HUF, Trusts, etc.
- Statement 2 is correct: A fully convertible capital account provides three key benefits. These are stock market returns, reduction in transaction cost due to free rupee convertibility, and improvement in savings and investments which effectively accelerates growth.
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With reference to Capital Account Convertibility, consider the follow...
Capital Account Convertibility (CAC) refers to the freedom to convert a country's local financial assets into foreign financial assets and vice versa. In the Indian context, CAC implies that Indian residents can freely purchase and sell foreign financial assets and vice versa.
Statement 1: India has a full convertible capital account policy.
This statement is incorrect. India does not have a full convertible capital account policy. India has been gradually moving towards fuller capital account convertibility, but it has not yet achieved it. The Reserve Bank of India (RBI) has implemented a calibrated approach towards capital account liberalization to minimize the risks associated with sudden and large capital flows.
Statement 2: A fully convertible capital account effectively accelerates growth.
This statement is also incorrect. While CAC can help in attracting foreign investment, it can also lead to an increase in short-term capital flows, which can be volatile and destabilizing. Countries with fully convertible capital accounts are often more vulnerable to external shocks, such as sudden capital outflows or exchange rate fluctuations. Furthermore, CAC may not necessarily lead to increased economic growth if other structural reforms are not in place.
Therefore, both statements are incorrect, and the correct answer is option B.
Statement 1: India has a full convertible capital account policy.
This statement is incorrect. India does not have a full convertible capital account policy. India has been gradually moving towards fuller capital account convertibility, but it has not yet achieved it. The Reserve Bank of India (RBI) has implemented a calibrated approach towards capital account liberalization to minimize the risks associated with sudden and large capital flows.
Statement 2: A fully convertible capital account effectively accelerates growth.
This statement is also incorrect. While CAC can help in attracting foreign investment, it can also lead to an increase in short-term capital flows, which can be volatile and destabilizing. Countries with fully convertible capital accounts are often more vulnerable to external shocks, such as sudden capital outflows or exchange rate fluctuations. Furthermore, CAC may not necessarily lead to increased economic growth if other structural reforms are not in place.
Therefore, both statements are incorrect, and the correct answer is option B.
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With reference to Capital Account Convertibility, consider the following statements: India has a full convertible capital account policy. A fully convertible capital account effectively accelerates growth. Which of the statements given above is /are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'B'. Can you explain this answer?
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