Capital account convertibility will no doubt relate India to the rest of the world much more closely but it would also throw up some new challenges. The government should follow fiscal discipline and be doubly sure of Indias economic strength before going ahead with full capital account convertibility.

With the Prime Minister asking the Finance Ministry and the Reserve Bank of India to sketch the road map for Capital Account Convertibility (CAC), once again the expectation that the rupee is close to full convertibility has become a reality. Presently, current account convertibility is allowed in India where residents are allowed to make and receive payments in foreign currency for exports, imports and trade in services. Individuals can also carry foreign currency for their travel abroad. Capital account convertibility is restricted and full capital account convertibility would allow free conversion of Indian assets into foreign currency assets and vice versa.

But this is not the first time when RBI was asked to prepare the road map for CAC. In fact, Tarapore Committee submitted this road map in 1997 according to which full capital account convertibility should have been a reality by 2000. But due to various reasons including the South East Asian crises, full capital account convertibility remained a dream. So how have things changed now that the Prime Minister thinks it appropriate to go for full capital account convertibility?

While asking the RBI to prepare the road map, the Prime Minister said that India is more comfortable both externally and internally and that the time is ripe now for full capital account convertibility. So, how have things changed from then? A look at the pre-conditions set by the Tarapore Committee would throw some light on what would be expected before India goes in for full capital account convertibility. Among others some of the recommendations included fiscal consolidation which aimed at reducing the Gross Fiscal Deficit to GDP ratio from 4.5% in 1997 to 3.5% by 2000, the year when the rupee was supposed to become fully convertible.

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