Need $8000 Per Capita Income for Full Capital Convertibility

The BoP is a financial statement of all transactions (trade, investments, remittances, etc.) between a country and the rest of the world. It consists of two key accounts:

Current Account

• Deals with the import and export of goods and services.
• Includes trade balance, remittances, and income from investments.
• India has full current account convertibility, meaning rupees can be freely exchanged for foreign currencies for trade and services.

Capital Account

• Deals with the cross-border movement of capital through investments, loans, and borrowings.
• India has partial capital account convertibility, with restrictions on certain foreign exchange transactions.

Current Account Convertibility: Freedom to convert rupees to other currencies for payments without restrictions.

What is Capital Account Convertibility?

• Freedom to convert rupees into foreign currency (and vice versa) for investment transactions without restrictions.
• No constraints on Indians acquiring foreign assets or NRIs bringing foreign currency into India for asset acquisition.
• Currently, India allows partial capital account convertibility with limitations on unrestricted capital flows.

Why Do Developing Countries Like India Restrict Capital Account Convertibility?

• Volatile Capital Flows: Unrestricted inflows and outflows can destabilize financial markets.
• Exchange Rate Risk: Large foreign exchange movements can lead to currency appreciation/depreciation, impacting exports and inflation.
• Monetary & Financial Stability: Unregulated capital flows could cause rapid economic crises, as seen during the 1997 East Asian Financial Crisis.