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CHAPTER 12 FULL CONVERTIBILITY OF THE RUPEE INTRODUCTORY : The Foreign Exchange Regulation Act 1947 was promulgated in 1947 with object of regulating certain dealings in foreign exchange and the import and export of currency and bullion. The basic control was directed towards dealings in Foreign exchange and payments which directly affect foreign exchange resources. The exchange control consisted of restricting purchase and sale of foreign exchange by general public and payments involving nonresidents. Restrictions were also imposed on the import and export of Indian currency, Foreign currency and bullion. An official exchange rate was fixed by the Reserve Bank of India for the conversion of Indian currency into foreign exchange. All transactions in foreign exchange were governed by this official rate of exchange. By virtue of these controls exercised by the Reserve Bank of India, all foreign exchange earned and received by any person in India were required to be sold to authorised dealers so that all foreign exchange earned or received can be converted and utilised only according to the priorities fixed by the Government. These controls were necessary at a time when India was still an undeveloped country exporting only agricultural products and raw materials like Iron ore, manganese ore, mica etc., and importing almost all the required consumer goods. However, with four decades of such controlled and regimented system, India has been able to reverse the pattern of trade to a considerable extent. Instead of exporting merely agricultural products etc., and importing consumables, we are now in a position to export sophisticated electronic gadgets and import mainly capital equipments and intermediate products for our Industrial development. To move economy further in this direction some relaxation in the controls exercised on foreign exchange was found imperative and this has been brought about by what is termed as "Liberalised Exchange Rate Management System", (LERMS for short), introduced with effect from 1.3.1992. LERMS : Under the LERMS, Exporters of goods and services and those who are recipients of remittances from abroad could sell the bulk of their foreign exchange receipts at market determined rates. Similarly, those who need to import goods and services or undertake travel abroad could buy foreign exchange to meet such needs, at market determined rates from the authorised dealers, subject to their transactions being eligible under the liberalised exchange control system. However, in respect of certain specified priority imports and transactions, provisions were made in the scheme for making available foreign exchange at the official rate by the Reserve Bank of India.

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By this scheme, partial convertibility of the rupee was introduced. 40% of the foreign exchange received on current account receipts, whether through export of goods or services alone needed to be converted at the official rate, while take remaining 60% was convertible at market determined rates. The imports of materials other than petroleum, oil products, fertilizers, defence and life saving drugs and equipment always had to be effected against market determined rates. All receipts of foreign exchange were required to be surrendered to authorised dealers as was the practice hitherto. The rate of exchange for the transactions was to be the free market rate quoted by authorised dealers except for 40% of the proceeds which would be based on the official rate fixed by the Reserve Bank of India. The authorised dealers were required to surrender 40% of their purchases of foreign exchange to the RBI at official rate. The remaining 60% could be retained by them for sale in free market for all permissible transactions. The Exporters were also given a choice to retain a maximum of 15% of the export earnings in foreign exchange itself, which could be utilised by them for their own personal needs. FULL CONVERTIBILITY: Although the Minister of Finance had indicated during his presentation of the 1992-93 Budget that full convertibility of the rupee would be introduced in a span of 3 or 4 years, full convertibility was announced much earlier and in fact it is the highlight of the 1993-94 Budget. There is, however, a subtle difference in the full convertibility of the rupee introduced in India and the concept of full convertibility prevailing in developed countries like the U.K., U.S.A. etc. In developed countries, full convertibility means that their currency is freely convertible anywhere in the world. Their home currency can be converted into foreign currency without any restriction. One does not have to disclose even the purpose of such conversion. For instance, U.S. Dollars can be changed into Sterling Pounds in New York, Japanese Yen could be exchanged to Deutsche Marks in Frankfurt, Australian Dollars can be converted into Candian Dollars in Adelaide etc., The exchange rate is controlled by the position of supply and demand in the market. The full convertibility announced in the Union Budget of 1993-94, however, allows convertibility only in the current account, which means the amount received by way of sale proceeds of exports, paid for imports and the remittance by NRIs etc., alone are convertible at market determined rates. In the last year's Budget, a dual exchange rate was announced i.e., 60% at market rates and 40% at the official rate. In the current Budget, the dual exchange rate has become a unified exchange rate which is a 100% conversion of foreign exchange at market rate. This is described as Full Convertibility. This does not mean that one can get any amount of foreign exchange at market rate for

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meeting any of one's needs. The Reserve Bank of India will permit sale of foreign exchange currency to anyone only for those purposes which are stipulated by the Govt. of India. It does not permit conversion of one's savings in the country for investment in foreign countries, as could be done by the citizens of developed countries like the U.K. or U.S.A. For instance, if a citizen resident in India wishes to undertake a foreign travel, the exchange for such travel can be had only as per the norms prescribed by the Govt. under the Foreign Travel Scheme. Full convertibility of the Rupee we have adopted for our country is tied up with exchange controls and restriction envisaged by the provisions of the F.E.R. Act 1973 as amended. Full convertibility has been introduced only as a measure of reforms to revitalise the economy of our country and to bring it on to the path of liberalisation. The New Economic Policy ushered in by out Govt. is with a view to take India forward from a controlridden-inward-looking economy into a market - friendly, forward looking progressive and dynamic economy. Full convertibility of the rupee, lower Customs and Central Excise duties, relaxation of Import / Export restrictions, streamlining of procedural rules governing taxations, streamlining of procedural rules governing taxation laws etc.,. have opened out our economy with a view to expansion and globalisation of our trading activities. These are measures taken to move India forward in her march towards economic freedom. ADVANTAGES : a. Full convertibility will enable Exporters to get a higher price for the goods exported. This is certainly a big incentive for increasing export. b. Since the Importers have to pay more than the goods imported, there will be a natural tendency to import less, confining the imports to absolutely necessary items although the Export/Import Policy has been liberalised. c. Malpractices like under-invoicing of exports may not arise as the rupee is fully convertible and full value of exports is realised. d. Indian rupee would become stable and the gap in the balance of trade reduced considerably. A self balancing mechanism of import export trade will eventually get established. CONCLUSION : The Govt. had however stated that if the value of the rupee depreciates to an unreasonable level in the free market operations, the R.B.I. will intervene and control it. This assurances certainly gives credence to the earnestness and sincerity with which the full convertibility has been announced. What is important is that changes in the global markets will automatically get reflected in the Indian markets on account of the

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full convertibility. This is certainly a move in the right direction. Instead of remaining as an insulated economy, India will surge forward as a free economy, unfettered and opened out for the world markets.

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