2. OBJECTIVES OF THE COMMITTEE
• To review the experience of various measures of capital account
liberalisation in India
• To examine implications of fuller capital account convertibility on
monetary and exchange rate management, financial markets and financial
system
• To study the implications of dollarisation in India of domestic assets and
liabilities and internationalisation of the Indian rupee
• To provide a comprehensive medium-term operational framework, with
sequencing and timing, for fuller capital account convertibility taking into
account the above implications and progress in revenue and fiscal deficit
of both centre and states
• To survey regulatory framework in countries which have advanced
towards fuller capital account convertibility
• To suggest appropriate policy measures and prudential safeguards to
ensure monetary and financial stability
• To make such other recommendations as the Committee may deem
relevant to the subject.
3. DEFINITION OF CAC
• CAC refers to the freedom to convert local financial assets into
foreign financial assets and vice versa. It is associated with
changes of ownership in foreign/domestic financial assets and
liabilities and embodies the creation and liquidation of claims
on, or by, the rest of the world. CAC can be, and is, coexistent
with restrictions other than on external payments.
4. TIMELINE
• A five year period is divided into –
– First phase(2006-07)
– Second phase(2007-09)
– Third phase(2009-11)
• A phased approach would let the authorities
to undertake a stock taking after every phase.
6. Recommendations
• Removal of tax benefits to NRIs.
• Greater autonomy to RBI.
• Complete cheek on fiscal deficit.
• Disallowing investment channel led through a particular country (like
Mauritius).
• Reduction of government stake in banks from 51 per cent to 33 per cent.
• Allowing industrial houses a stake in existing banks or allowing them to
open a new banks.
• Allowing enhanced presence of foreign banks.
• 10 per cent voting limit for investment in banks should be scrapped.
• Non-resident corporates should be allowed to invest in Indian markets.
• All individual NRIs should also be allowed to invest in Indian Market.
7. • Revenue deficit of both central and states should be
eliminated by 2008-09 and building a revenue surplus of 1
per cent by Financial Year 2011.
• Raising the ceiling on External Commercial Borrowing
(ECB).
• Banning Participatory Notes (PNs) and phasing out the
existing PNs within one year.
• Enhancing the ceiling on government debt from $2 billion
to 10 per cent of issuance and $1-5 billion to 25 per cent of
new issuances in a year of corporate debt.
• Building adequate reserve and limiting the current account
deficit to under 3% of GDP.
• All banks should be brought under Companies Act.
8. • The committee has suggested for providing
greater financial freedom for all the three key
stakeholders of this process– resident
individuals, domestic companies and foreign
investors.
9.
10. Need for 2006 Committee
• The Indian macroeconomics situation as also
the international economy have undergone
significanct changes since 1997.
• There have been large inflows into India in
recent years.
11. Participatory Notes
Participatory notes or contract notes are the
financial paper or instruments representing Indian
shares, issued by foreign financial institutions to
overseas Investors who are not eligible to invest in
India.
• Banning of fund inflows under participatory
notes
12. Tax Benefit
• The panel suggests that all non resident
should be treated on equal footing and special
treatment given to non-resident Indians
should be done away with.
• It makes a suggestion for the review of double
taxation treaties.
13. Benefits and Flip side
• The Assocham, an apex industry body, has called for
immediate introduction of CAC on the back of strong
economic fundamentals and buoyant economic condition.
• Overall the committee’s phased approach to CAC appears
to be cautious and incremental in nature, with measures
being conditional on the government improving its
finances, lowering inflation and implementing banking
sector reforms.
• it helps the Indian companies to access unhindered funds
from abroad, make it easier for foreign companies to invest
in India, and it maximises the efficiency in the use of capital
across the world.
• IMF says that there are important collateral benefits to full
convertibility in the form of better banks, stronger capital
markets and more macro economic discipline.
14.
15.
16. Conclusion
• The report encompasses good, bad and
unnecessary recommendations. It fails to address
several issues.
• The panel does not attempt any stress-testing for
liberalization schemes suggested.
• The countries without capital controls are
essentially uncorrelated with long term economic
performance.
• It is widely perceived that convertibility can be a
boon or a bane and a lot depends on the strength
of the underlying economy and its institutions.
