INTRODUCTION
The objective of this paper is to discuss the highly intensified debate on the issue of Capital Account Convertibility (CAC) in India. There is no formal definition of Capital Account convertibility but the Tarapore committee set up in February 1997 gave a pragmatic working definition of CAC as “CAC refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It 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. CAC can be, and is, coexistent with restrictions other than on external payments. It also does not preclude the imposition of monetary/fiscal measures relating to foreign exchange transactions which are of a prudential nature”. So this means that CAC will result in free and unregulated inflow and outflow of Capital funds. India has since long adopted the Current Account Convertibility wherein the exporters and importers can have easy conversion to and forth in foreign currency where they trade.
Benefits of Capital Convertibility
The implementation of CAC opens up the economy in terms of capital inflows and outflows:
1. Greater Capital Mobility: If CAC is allowed, it is argued that foreign fund inflows to the country become easier thus increasing the availability of large capital stock. Developing nations, which are usually capital-scarce, are blessed under unhindered mobility of capital and this capital can be used in long term investments thus raising the national income.
2. Access to global pool of savings: Once the door to investing in international securities gets opened up, CAC will allow residents to hol ...