Paradox of Full Capital Account Convertibility in India

Abstract

In the light of the controversy regarding capital account convertibility (CAC) in the Indian context, the study theoretically addresses the benefits and chaos arising due to the full capital account convertibility, given the experience of the world economies in the recent past. This supports the general consensus that even though the economy is doing better in all fronts but still almost five years later, it has not been successful in achieving all the targets set by the Tarapore Committee (1997) as the conditions for moving into full capital account convertibility. Therefore, the economy should not now be in a rush to go for adopting ful1 capital account convertibility. Even though the targets set by the committee are arbitrary and there is scope for relaxing the same, given the fact that the foreign institutional investment is more susceptible to macroeconomic fluctuations or financial trouble than foreign direct investment, the country should take steps only in promoting foreign direct investment, which would promote higher growth rate and spread the growth benefits across different regions of the economy than promoting foreign institutional investment which is more speculative and can make the economy volatile and fragile.