Which of the following best explains the core philosophy and operational implications of the Foreign Exchange Regulation Act (FERA), 1973, and why it became incompatible with India's post-1991 economic reforms?
Show answer & explanation
Correct answer: B
Explanation
Solution: The correct answer is FERA treated foreign exchange as a scarce commodity and imposed criminal liability for even minor violations.
Explanation:
☛ The Foreign Exchange Regulation Act (FERA) was enacted in 1973 and came into force on 1 January 1974.
☛ FERA's core philosophy was based on the premise that foreign exchange was an extremely scarce national resource that required strict conservation and stringent state control.
☛ Under FERA, any contravention of rules was considered a criminal offense, carrying the presumption of a culpable mental state (guilty mind) and provisions for arrest and imprisonment.
☛ Following the 1991 economic reforms (Liberalisation, Privatisation, and Globalisation), India sought to attract foreign investment and integrate with the global market.
☛ FERA's restrictive and punitive framework discouraged foreign investors and created severe hurdles for cross-border trade, making it incompatible with modern economic policies.
☛ To resolve this, FERA was repealed and replaced by the Foreign Exchange Management Act (FEMA), 1999, which shifted the approach from 'regulation' to 'management'.
Extra Exam-Relevant Facts:
☛ FEMA vs. FERA: Under FEMA, violations are treated as civil offenses punishable primarily by monetary penalties, whereas under FERA, they were criminal offenses.
☛ Enforcement Directorate (ED): The Directorate of Enforcement was established in 1956 under the Department of Economic Affairs to investigate violations of foreign exchange laws.
☛ Full Convertibility: India introduced full convertibility of the rupee on the current account in August 1994, following the recommendations of the C. Rangarajan Committee.
Important One-Liners for Upcoming Exams:
☛ In which year was the Foreign Exchange Management Act (FEMA) passed by the Indian Parliament? → 1999
☛ On which date did the Foreign Exchange Management Act (FEMA), 1999 officially come into force? → 1 June 2000
☛ Which agency is primarily responsible for enforcing the provisions of FEMA in India? → Directorate of Enforcement (ED)
☛ Under FEMA, 1999, foreign exchange violations are classified into what type of offenses? → Civil offenses
☛ Which committee set up by the RBI submitted reports on Capital Account Convertibility in 1997 and 2006? → S. S. Tarapore Committee