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