Mumbai, Sept. 1: In five years, the rupee is poised to join an elite basket of currencies that are freely tradable.
The Reserve Bank-appointed Tarapore committee has set out the road to capital account convertibility, defining it as “the freedom to convert local financial assets into foreign financial assets and vice versa”, which will be covered in three phases starting this year.
The second phase will be spread over 2007-08 and 2008-09 and the third 2009-10 and 2010-11.
Simply put, capital account convertibility means no restrictions on currency movement into and out of the country.
In the first phase, the committee has suggested that individuals should be allowed to make remittances of $50,000 every calendar year, twice the present limit.
The rupee is already convertible in what is known as the current account. For individuals, current account transactions include gifts, donations and travel abroad.
There are now separate limits for each of these transactions. The committee has proposed to sweep aside these sub-limits, putting in place an overall ceiling of $25,000.
A radical measure suggested by the committee is to allow resident Indians who have foreign currency accounts at home “to move the foreign currency balances to overseas banks”.
Those who choose to maintain the accounts in India will be provided foreign currency current/savings cheque-able accounts in addition to foreign currency term deposits.
All foreigners will get the facility, now available to NRIs, of opening accounts in Indian banks under the foreign currency non-resident (bank) scheme and the non-resident external scheme which come with tax breaks. The concessions will be reviewed. Foreigners will also be able to invest in the stock market.
One proposal of the committee that will raise the hackles of the Left is to lower government holding in public sector banks to 33 per cent from the existing 51 per cent.
The government holds over 51 per cent in most banks. Last week, the cabinet proposed to scale back its 58 per cent holding in the State Bank of India through a public issue of shares after moving a legislation in the winter session to amend the State Bank of India Act.
The committee has gone a little further and suggested that all public sector banks should be brought under a single overarching legislation.
There are big-bang suggestions for companies as well: it has suggested that industrial houses should on a case by case basis be allowed to pick up stakes in banks and set up new banks. This is again a suggestion that could be viewed as a red rag by the Left.
It also proposes to raise the limits on corporate investment abroad from 200 per cent to 400 per cent of net worth.
“Fuller capital account convertibility would not necessarily mean zero capital regulation,” the committee said. The new regime should be treated only as a means to realise the potential of the economy to the maximum possible extent at the least cost, it added.