Discuss the PROs AND CONS of Capital Account Convertibility

Capital account convertibility

Capital account convertibility (CAC) or a floating exchange rate means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.

Argument in Favor

It facilitates foreign investments and borrowing. So competition is increased = more factories = more jobs = more product choices for consumers = good for economy.

Argument Against

a) Local producers have to compete with International giants. So they lose market and customers.
b) What if foreigners buy a lot of factories in India and suddenly they find that investing money in France is better than in India. So they immediately sell all those factories, get their Rupees converted into Euro and run away! That’ll lead to huge job loss and collapse in Indian economy cons being the sudden flight of capital and thereby triggering in the recessionary trends and could even lead to depression..creating a similar situation of the Mexican crisis.
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2 Comments

  1. Are u saying it right that cac leads to capital flight because company sells itself n run away because if company buys aplant n machinery then it would be under FDI and fdi is a long term investment and there is no risk of capital flight in FDI. (In FII, there is).

  2. i am from hyderabad..i am abelow average student and i completed ny btech from jntu university..i never concentrated on my studies and it took 8 years to complete my btch..if i start preparing my civils can i achieve it,,?or my 8 yrs degree is a minus point at the time of interview ..please suggest

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