15.8 ndian onom
economy.14 Basically, it is the net outcome of should always be kept in mind that the issue of
the current and capital accounts of an economy. currency convertibility is concerned with foreign
It might be favourable or unfavourable for the currency outflow only.
economy. However, negativity of the BoP does
not mean it is unfavourable. A negative BoP is convertibility in inDiA
unfavourable for an economy if only the economy India’s foreign exchange earning capacity
lacks the means to fill the gap of negativity. was always poor and hence it had all possible
The BoP of an economy is calculated on the provisions to check the foreign exchange outflow,
principles of accountancy (double-entry book- be it for current purposes or capital purposes
keeping)15 and looks like the balance sheet of a (remember the draconian FERA). But the process
company—every entry shown either as credit of economic reforms has changed the situation to
(inflow) or debit (outflow). If there is a positive unidentifiable levels.
outcome at the end of the year, the money is
automatically transferred to the foreign exchange current Account
reserves of the economy. And if there is any Current account is today fully convertible
negative outcome, the same foreign exchange is (operationalised on 19 August, 1994). It means
drawn from the country’s forex reserves. If the that the full amount of the foreign exchange
forex reserves are not capable of fulfilling the required by someone for current purposes will be
negativity created by the BoP, it is known as a made available to him at official exchange rate and
BoP crisis and the economy tries different means
there could be an unprohibited outflow of foreign
to solve the crisis in which going for forex help
exchange (earlier it was partially convertible).
from the IMF is the last resort.
India was obliged to do so as per Article VIII of
the IMF which prohibits any exchange restrictions
convertibility on current international transactions (keep in
An economy might allow its currency full or mind that India was under pre-conditions of the
partial convertibility in the current and the IMF since 1991).
capital accounts. If domestic currency is allowed
to convert into foreign currency for all current cAPitAl Account
account purposes, it is a case of full current After the recomendations of the S.S. Tarapore
account convertibility. Similarly, in cases of capital Committee (1997) on Capital Account
outflow, if the domestic currency is allowed to Convertibility, India has been moving in the
convert into foreign currency, it is a case of full direction of allowing full convertibility in this
capital account convertibility. If the situation is account, but with required precautions. India
of partial convertibility, then the portion allowed is still a country of partial convertibility (40:60)
by the government can be converted into foreign in the capital account, but inside this overall
currency for current and capital purposes. It policy, enough reforms have been made and to
certain levels of foreign exchange requirements,
14. Samuelson and Nordhaus, Economics, p. 601.
15. It means that each external transaction is recorded/
it is an economy allowing full capital account
entered twice—once as a credit and once as a debit of convertibility—
an equal amount. This is because every transaction has (i) Indian corporate are allowed full
two sides—we sell something and we receive payment
for it, similarly we buy something and we have to pay convertibility in the automatic route
for it (See Salvatore, International Economics, p. 432). upto $ 500 million overseas ventures