Need $8000 Per Capita Income for Full Capital Convertibility

  • March 2, 2025
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Need $8000 Per Capita Income for Full Capital Convertibility

Sub: Eco

Sec : National income

Why in News?

  • Arvind Panagariya, Chairman of the 16th Finance Commission, stated that India should not rush into full capital account convertibility at its current per capita income level and suggested that this reform should only be considered when per capita income reaches $8,000-$10,000.
What is Balance of Payments (BoP)?

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.
economy Need $8000 Per Capita Income for Full Capital Convertibility