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FULL Capital Account Convertibility:India's Readiness in the context of Financial Integration

Bhattacharya, Sulagna (2009): FULL Capital Account Convertibility:India's Readiness in the context of Financial Integration.

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Abstract

During the recent turmoil in world financial market and its cascading disruptive effects, the role of financial integration assumes importance. A common outshoot of such financial crises generated locally or regionally is that they spread faster to other connected markets and economies to the extent such markets and countries are integrated with the originator country. The emerging/developing/non-developed countries bear their share of the brunt mostly due to their dependence on the advanced economies by way of trade or financial partnerships. There exists the famous adage: “If the US sneezes, rest of the world catches pneumonia.” As of late, the severity of this phenomenon might have been reduced – owing largely to emergence of alternate economic powers that are characterized by high rate of sustained growth – and also to what economists call the “De-Coupling Effect” – that some of these economies have been able to insulate themselves from shockwaves in other countries in such a way that susceptibility to such external disruptions has lessened, the domestic balance remaining largely unaltered. However, in the age of increasing global integration, growing countries can not afford to stay highly insulated, closed or de-coupled from other economies. To accelerate such integration, countries resort to various approaches, financial integration being a prime one among them. And financial integration presupposes capital account liberalization. At one end of the spectrum is fully restricted capital account; at the other, a fully convertible capital account. Many of the developed countries practice the later. The least developed countries have a too low extent of capital account liberalization. The emerging countries largely fall midway – they have partially open and liberalized capital account. Among the emerging economies, India occupies a dominant space. According to IMF and other reports, India would come in the top three of the economically most powerful economies by 2050. It has a much higher growth rate (more than 8% per annum) compared to many developed countries. This paper examines the status of readiness of India in adopting a fully convertible capital account, keeping in mind its present and future financial integration status and objectives.

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