Capital Account Convertibility, The Unfinished Agenda: Mark I

This paper deals with issue of Capital Account Convertibility, in the context of the Indian economy. The issue has been in and out of fashion as far as the priority of the policy makers in India is concerned. The paper essentially derives from the earlier work done by Rao et al, and uses optimal control to gain insight into the functioning of the Indian economy. The underlying model is a small prototype ‘monetary model’ and represents mark I of the ongoing debate. The limitations and possible extensions of the study have been indicated. The general conclusion of the paper is that whilst CAC continues to represent a desirable objective, it would be prudent to attain it cautiously. Haste in this regard can seriously and disproportionately cause the Indian economy great harm whereas not attaining it immediately will probably not hinder the consolidation of the Indian economy’s progress towards attainment of 8% trend growth. Thus while continuing on an even and steady keel, what is of utmost importance is to strengthen the domestic economy further in the first instance. 1 First author is a faculty member of the Department of Economics, University of Mumbai, the second author is a Director, (DESACS, RBI) and the third author is a research scholar at the Department of Economics, University of Mumbai. The views expressed in the paper are not necessarily those of the institutions to which the authors belong. The authors wish to record their sincere thanks to Prof. Y.K. Alagh (President, Institute for Economy and Development, ORF) for commissioning this study.