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CAPITAL ACCOUNT LIBERALISATION (Arguments in favour of Capital Account…
CAPITAL ACCOUNT LIBERALISATION
Background
Foreign exchange transactions
Current Account
Capital Account
Arguments in favour of Capital Account Liberalisation
Bring in financial efficiency
Can attract larger foreign capital
Increase the choices for investments
Improves competitive discipline
Helps complement current account
Changed global scenario
capital controls are increasingly becoming ineffective
Arguments against Capital Account Liberalisation
Could lead to the export of domestic savings
Could lead to greater tax avoidance
Could expose the economy to greater macroeconomic instability
May lead to ineffective monetary policy
divert resources from tradable to non-tradable sectors - Dutch disease effect
Could lead to financial bubbles
Way Forward
trade-off between growth/efficiency and stability
India’s preference has strongly been in favour of avoidance of instability
imperative to ensure that liberalisation of the capital account responds to the requirement of the economy in an appropriate, gradual and cautious manner