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Kerala PSC Indian Economy Book Study Materials Page 422
Book's First Page15.8 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