What was the economic rationale behind India's move to current account convertibility in 1994, and how did it impact India's external sector and global integration?
Show answer & explanation
Correct answer: B
Explanation
Solution: The correct answer is It enabled full convertibility of the rupee for trade in goods, services, and remittances, thereby liberalizing the external sector without exposing the economy to volatile capital flows.
Explanation:
☛ In August 1994, India officially accepted the obligations of Article VIII of the International Monetary Fund (IMF), thereby establishing full current account convertibility.
☛ Current account convertibility allows the freedom to convert domestic currency into foreign currencies (and vice versa) at market-determined exchange rates for transactions involving trade in goods, services, tourism, education, interest payments, and unilateral transfers/remittances.
☛ This move significantly integrated India into global trade networks, improved export competitiveness, and encouraged remittance inflows.
☛ By liberalizing only the current account and maintaining controlled regulation over the capital account, India protected its economy from sudden speculative capital flight and international financial volatility.
Extra Exam-Relevant Facts:
☛ LERMS (Liberalised Exchange Rate Management System): Introduced in March 1992, it was a transitional dual-exchange-rate system where 40% of foreign exchange had to be surrendered at the official rate and 60% at market-determined rates.
☛ Unified Exchange Rate System: Implemented in March 1993, this unified the exchange rate system under a market-driven regime, paving the way for current account convertibility in 1994.
☛ Tarapore Committee: The Reserve Bank of India (RBI) appointed the S.S. Tarapore Committee in 1997 (and again in 2006) to lay out a roadmap for Full Capital Account Convertibility (CAC).
☛ Current Status: India enjoys full current account convertibility, but only partial (calibrated) capital account convertibility.
Important One-Liners for Upcoming Exams:
☛ In which year did India officially achieve full current account convertibility? → 1994
☛ Which Article of the IMF Articles of Agreement relates to the convertibility of current international transactions? → Article VIII
☛ Which committee was formed by the RBI in 1997 to outline a roadmap for Capital Account Convertibility? → Tarapore Committee
☛ What was the name of the dual exchange rate system introduced in India in 1992? → LERMS (Liberalised Exchange Rate Management System)
☛ Under which component of the Balance of Payments are cross-border personal remittances recorded? → Current Account