New Delhi: While the obvious uptake of this would mean more foreign money coming in, what does it mean for the common man? How will our life change if and when it becomes a reality?
On March 21st, the RBI set the ball rolling on full capital account convertibility (CAC) of the rupee by setting up a committee to chalk out a road map. The committee will begin work from May 1, 2006 and is expected to submit its report by July 31, 2006.
While the obvious uptake of this would mean more foreign money coming in, this will also allow local companies to tap foreign markets more easily. However, what does CAC mean for the common man? How will our life change if and when CAC becomes a reality?
For that, let us understand what CAC exactly means.
Basically CAC implies freedom to convert local currency into foreign currency and vice versa, for any purpose whatsoever, without needing any permission from the government.
The term "any purpose whatsoever" is important, for as of now India is convertible on the current account. This means one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted.
Therefore, let us try and understand the implications of CAC from the viewpoint of both an NRI as well as a Resident.
CAC for NRIs
Our NRI diaspora will benefit tremendously if and when CAC becomes a reality. The reason is on account of current restrictions imposed on movement of their funds.
As has been mentioned in these columns before, no one is born an NRI. An NRI becomes an NRI when he leaves India for a job or doing business abroad. Now what happens is that in the process, he may leave his Indian assets behind investments and monies that he owned when he was an Indian Resident. Though such funds and assets can be moved abroad, there are some rules and restrictions.
Though an NRI may remit an amount up to $1 million per calendar year, out of his NRO account for all bonafide purposes, to the satisfaction of the banker, for any such remittance, an undertaking from the remitter and a certificate from a chartered accountant is required.
For property, there is a lock-in of ten years. In other words, sale proceeds of a house that has been purchased using rupee funds, cannot be repatriated unless such house is owned for ten years.
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Then there are various documentary evidences that need to be submitted to the banker for proving that the purpose is bonafide. For example, if the money is required for medical purposes, a bill or an estimate form the overseas hospital or the doctor is required.
If its for education purposes, the I-20 or letter from the university along with the estimated fees would need to be submitted. Even for assets brought out of foreign exchange, which ordinarily should have full repatriability some restrictions creep in. For example, take real estate purchased out of foreign exchange. An NRI can repatriate funds representing the sale proceeds of only two such properties in his entire lifetime. CAC will eliminate these difficulties.
Implications of CAC for a Indian Resident
As most readers would know, as of now, we Residents cannot freely move money abroad. There are certain allowable limits beyond which permission from RBI is needed. The table lists the specific limits for purposes generally applicable.
As far as I am concerned, these limits are already quite liberal. Even if I wanted to I would not be able to use any additional funds allowed. Simply because I cant afford it. However, for those who harbour ambitions of buying a villa in the south of France or a studio apartment in Manhattan, I appreciate that $25,000 would be pocket change. Also, according to some Richie Riches, the limit for private travel is dismal and should increase at least ten fold.
In any case, the point here is that for the average person, CAC may not have a direct benefit. However, there could be indirect advantages. CAC would attract more FDI, more investments and a greater choice of products and services than are available currently. Therefore, in terms of quality of life and variety of products, both investment and consumer, CAC is something we all can look forward to.
Last point. The term “any purpose whatsoever” implies “any legal purpose whatsoever.” The laws of the land still stand irrespective of CAC. Therefore, things such as participation in online lotteries, or buying drugs or even subscription say to Mr. Hugh Hefner’s publication are still out of bounds!
The author is an investment consultant
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