Tuesday, May 29, 2007

Full and capital account convertibility

Sreenadh was asking me about the meaning and import of trade and current account convertibility and also about capital account convertibility.

Answer to such questions can elicit different responses from people with differing backgrounds. For our understanding, I would like to put it this way:

If you are able to pay for the goods and services that you are importing into the country without any hindrance i.e., no caps or restrictions, then it is called full convertibility on trade and current account. If you are only allowed to import certain goods with a kind of ceiling or cap fixed on them – say an individual cannot import more than $100 worth of magazines in a period of three months, then there is no full convertibility of current/trade account. Current account or trade convertibility also includes your ability to export some goods and services and get paid in any currency by the foreign importer. When you receive that foreign currency in India, if the Central Bank is not going to place any restrictions on conversion of that currency into local currency, then that is full convertibility.

If a foreigner is allowed to invest in the country in any sector without any fear of restrictions being there on the future repatriation of profits and/or capital on winding up of operations, then it is full convertibility on capital account. Similarly there is another side to this coin. You should be able to invest (establish companies, factories etc.) in any foreign country without any fear of your being denied equivalent foreign currency if you give local currency to the Central Bank (RBI).