CURRENT ACCOUNT AND THEIR CONVERTIBILITY

BALANCE OF TRADE

BALANCE OF INVISIBLES

Services

Incomes

Current TranSfer

Chronology

1950-1960- Current account deficit mirrored the deficit in merchandise trade.

Mid 1970-Mid 1980- surpluses in invisible trade compensated the trade deficit.

Second half of 1980- Distinct decline in support from invisibles.

Post 1990-91- resumption of growth in net invisible earning.

Export of servicesTransportation,communication,financial

services,copyrights,lincense,patents,busi

ness services, worker’s

remittance,tourism fall in domain of

services.

Services export emerged from stagnation

in 1950-60 with travel services along with

other business services.

Since 1990 transportation services saw

an offset compensated by business

services.

IT and ITES enabled services have grown

at an average rate of 46% since mid

1990’s.

Worker’s remittance

Linked to labour migration.

More reliable source of external finance than capital inflows.

Witnessed lowest volatility among all components of current receipt after merchandise export.

Interesting difference between India and China.

LEVELS AND SOURCES OF REMITTANCES

Closely linked to export of professional and

business services.

India is currently the highest remittance receiver

nation.

Shift in regional source of flow of remittance for

India since 1990.

Changed from middle east to US and UK.

List of the top remittance receiving nations

CONVERTIBILITY OF CURRENT ACCOUNT

Free convertibility of currency means that the currency can be exchanged for any other convertible currency without any restriction at the market determined exchange rates.

Convertibility of rupee means that the rupee can be freely converted in to dollar, yen, pound, euro etc. and vice versa at market determined exchange rates.

India adopted 100% convertibility of Indian rupee in 1994.

Why fully convertible ??

Encouragement to exports

Encouragement to import substitution

Incentive to send remittances from abroad

A self – balancing mechanism

Integration of World Economy

Why not!!

May lead to inflation.

May lead to depreciation of currency.

May lead to volatility of currency.