The Reserve Bank of India established the Committee on Capital Account Convertibility (CAC) or S.S Tarapore Committee to propose a roadmap for full convertibility of the rupee on the capital account. In May 1997, the committee submitted its report. There is no clear definition of CAC, according to the committee. According to industry standards, the CAC refers to the ability to convert local financial assets into international financial assets or vice versa at market-determined exchange rates. The UPSC IAS Exam includes the S.S Tarapore Committee as an important topic in the Indian Economy Syllabus.

S.S Tarapore Committee – Objectives

• To examine India's experience with various forms of capital account liberalization.
• To examine the effects of increased capital account convertibility on monetary and exchange rate policy, financial markets, and the financial system.
• To examine the effects of dollarization of domestic assets and liabilities in India, as well as the internationalization of the Indian rupee.
• To develop a complete medium-term operational framework, including sequencing and timing, for fuller capital account convertibility, taking into account the foregoing implications as well as improvements in both the center and the states' revenue and fiscal deficits.
• To examine the regulatory structure in nations that have made significant progress toward greater capital account convertibility.
• To make policy recommendations and prudential safeguards to maintain monetary and financial stability.

Definition of Capital Account Convertibility (CAC)

• The ability to convert domestic financial assets into international financial assets and vice versa is referred to as CAC.
• It represents the development and liquidation of claims on, or by, the rest of the world, and is related to changes in ownership of foreign/domestic financial assets and liabilities.
• Other than limits on external payments, CAC can and does coexist.

CAC has 5 basic statements designed as points of action

• All types of liquid capital assets must be able to be freely exchanged with standardized exchange rates between any two countries.
• The amounts must be considerable (more than $500,000).
• To avoid churning and excessive outflows, capital inflows should be invested in semi-liquid assets.
• National banks should provide collateral to buffer excessive inflows and outflows.
• Despite revisions in phrasing and extra safeguards over the years, some economists continue to criticize CAC. The restriction on inflows to Third World countries being invested in improvements is seen as unfavorable by American economists, who would want to see such transactions put to direct use in generating capital.

Reasons for the Introduction of CAC in India

• To ensure that the country's financial movement is unrestricted.
• It also aids India's efficient appropriation and distribution of foreign capital.
• This infusion of foreign funds into the country not only helps to balance the capital return rates across borders but also boosts output levels.
• It also results in a more equitable distribution of income in India.

Recommendations of S.S Tarapore Committee

• NRI tax benefits are being cut down.
• RBI will have more power.
• On the fiscal deficit, he's completely cheeky.
• Allowing investment channels to pass through a specific country (such as Mauritius).
• Reduction of the government's interest in banks from 51% to 33%.
• Allowing industrial houses to take a stake in existing banks or start new ones.
• Allowing international banks to have a stronger footprint.
• The 10% voting cap on bank investments should be abolished.
• Corporates from outside India should be allowed to invest in Indian markets.
• Individual NRIs should be able to invest in the Indian market as well.
• Both the national and state revenue deficits should be erased by 2008-09, with a revenue surplus of 1% by Financial Year 2011.
• Raising the limit on commercial borrowing from outside the U.S. (ECB).
• Participatory Notes (PNs) will be banned, and current PNs will be phased out over the next year.
• Raising the government debt ceiling from $2 billion to 10% of new issuance and $1-5 billion to 25% of new corporate debt issuances in a year.
• Building sufficient reserves and keeping the current account deficit below 3% of GDP.
• The Companies Act should be applied to all banks.
• All three essential stakeholders in this process, residents, domestic enterprises, and foreign investors, should have more financial flexibility, according to the committee.

Proposed Changes by Tarapore Committee

Conclusion

The Reserve Bank of India established the Committee on Capital Account Convertibility (CAC) or Tarapore Committee to propose a roadmap for full convertibility of the rupee on the capital account. In May 1997, the committee submitted its report. There is no clear definition of CAC, according to the committee. According to industry standards, the CAC refers to the ability to convert local financial assets into international financial assets or vice versa at market-determined exchange rates.