india & capital account convertibility

Indian currency is partially convertible. It means that indian rupee is convertible on current account but not on capital account. There has been talks in academia and industry that it should be made fully convertible which will allow free movement of capital. Moreover, it will raise the status of indian currency and it may become one of the reserve currencies in a decade or so. But ,there are some concerns about flight of capital from this country which will aggravate the situation in a capital scarce country.

The issue came in the merger talks between India based Airtel and Africa based MTN. There was stress on dual listing by the south african government as one of the conditionality for merger. The dual listing would have meant capital account convertibility and its not allowed in India. Thus, we have missed several business opportunities due to lack of capital account convertibility.

The government needs to implement capital account convertibility in a time bound manner. We need to fulfil the criteria before we can go for full convertibility. First of all, we should have sufficient foreign exchange reserves to avoid getting trapped in a situation where we dont have foreign exchange reserves to finance our imports as there may be temporary flight of capital. Secondly, we should get our infrastructural bottlenecks removed to ensure good investment opportunies for our investors. Such precautions, if taken ,will enable us to have a smooth ride to full convertibility