Tarapore Committee was associated with which one of the following?

1. Understanding the Balance of Payments (BoP) (basic)

Imagine the Balance of Payments (BoP) as a massive, systematic ledger that records every single economic transaction between the residents of a country and the rest of the world during a specific year. It is a double-entry system of accounting, meaning every credit (money coming in) has a corresponding debit (money going out) Indian Economy, Nitin Singhania, Balance of Payments, p.487. At its core, the BoP tells us whether a country is a net 'lender' or 'borrower' in the global market. If we receive more money than we pay out, we have a surplus; if we pay out more, we face a deficit Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.87.

The BoP is traditionally divided into two primary 'buckets': the Current Account and the Capital Account. The easiest way to distinguish them is by looking at assets and liabilities. Transactions in the Current Account deal with the 'here and now'—they do not change the ownership of assets or the level of debt. This includes the trade of goods (merchandise), services (like IT or tourism), and transfer payments (like gifts or remittances). On the other hand, the Capital Account involves transactions that directly alter the assets and liabilities of a country Indian Economy, Vivek Singh, Money and Banking- Part I, p.107. For example, if an American firm buys a factory in India (Foreign Direct Investment), India's assets/liabilities are changed permanently.

While we often talk about two accounts, modern accounting standards set by the IMF (known as BPM6) now prefer a three-way split: Current, Capital, and Financial Account. In this modern view, the 'Financial Account' records the heavy lifting of investments like stocks and bonds, while the 'Capital Account' is reserved for smaller items like the transfer of patents or copyrights Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.90. However, for most competitive exams, understanding the core distinction between 'Current' (income and trade) and 'Capital' (investment and debt) remains the vital first step.

Feature	Current Account	Capital Account
Nature	Flow of income/expenditure.	Change in asset/liability ownership.
Components	Goods, Services, Remittances, Interest/Dividends.	FDI, FII, External Borrowings (ECB), Loans.
Impact	Reflects current national income.	Reflects future claims on the economy.

Sources: Indian Economy, Nitin Singhania, Balance of Payments, p.487; Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.87; Indian Economy, Vivek Singh, Money and Banking- Part I, p.107; Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.90

2. Exchange Rate Regimes and Management (basic)

At its simplest level, an exchange rate is the price of one currency expressed in terms of another. Think of it as the 'conversion factor' that allows international trade to happen by linking different national currencies India and the Contemporary World – II. History-Class X, The Making of a Global World, p.77. There are two primary philosophies on how these rates should be determined: Fixed and Floating.

In a Fixed (or Pegged) Exchange Rate system, the government or Central Bank hitches the value of its currency to another major currency (like the US Dollar) or a commodity (like Gold). This provides incredible certainty and stability for traders and investors, helping to control inflation. However, the 'cost' of this stability is high; the government must maintain massive foreign exchange (forex) reserves to intervene whenever market forces try to push the rate away from the fixed peg Indian Economy, Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.494.

On the other end of the spectrum is the Floating (or Flexible) Exchange Rate, where the value is determined entirely by market forces of demand and supply. If more people want to buy Indian goods, the demand for Rupees goes up, and the Rupee appreciates. This system acts as a 'shock absorber' for the economy, but it can be highly volatile Indian Economy, Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.507. Within floating rates, we distinguish between two types:

• Free Float: The Central Bank never intervenes. The market is the sole judge (e.g., the US Dollar or Japanese Yen) Indian Economy, Vivek Singh, Money and Banking- Part I, p.41.
• Managed Float (Dirty Float): This is the Indian system. While the market generally determines the rate, the Reserve Bank of India (RBI) steps in to buy or sell dollars if the Rupee becomes too volatile. The goal isn't to set a specific price, but to ensure 'orderly' movement Indian Economy, Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.493.

Feature	Fixed Exchange Rate	Floating Exchange Rate
Determination	Set by Government/Central Bank	Market Demand and Supply
Forex Reserves	High requirement to maintain peg	Lower requirement (in theory)
Monetary Policy	Often becomes ineffective	More autonomy for the Central Bank
External Shocks	Economy is highly exposed	Provides insulation/protection

Sources: India and the Contemporary World – II. History-Class X, The Making of a Global World, p.77; Indian Economy, Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.493-494, 507; Indian Economy, Vivek Singh, Money and Banking- Part I, p.41

3. Current Account Convertibility in India (intermediate)

To understand Current Account Convertibility, we must first look at what the "Current Account" represents. In simple terms, it tracks the nation's day-to-day international transactions—everything from buying a smartphone from abroad to sending money to a relative overseas. As noted in Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.87, the Current Account includes the Balance of Trade (export and import of goods) and Invisibles (services, profit/interest income, and transfers like gifts or remittances).

Current Account Convertibility means that the government allows you to freely convert your Indian Rupees into foreign currency (like US Dollars) at market-determined rates to settle these specific types of transactions. For instance, if an Indian entrepreneur wants to import machinery worth $1 million, the RBI permits them to exchange their Rupees for those Dollars without needing a special government license for the currency swap. This freedom was a landmark shift in India’s economic history. Following the 1991 reforms, the Rupee was made fully convertible on the current account in August 1994 (preceded by a unified exchange rate in 1993), as highlighted in Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.109.

Why is this important? Before these reforms, India followed a "License Raj" where even buying foreign currency for travel or imports required arduous permissions. Today, Full Current Account Convertibility implies that for trade in goods and services, there are no quantitative restrictions on the exchange of currency. However, it is important to distinguish this from the Capital Account (which deals with assets like land or stocks). While we can freely trade goods, we still have restrictions on moving massive amounts of wealth out of the country to buy foreign assets Indian Economy, Nitin Singhania (2nd ed. 2021-22), Chapter 17, p.498.

Sources: Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.87; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.109; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Chapter 17: India’s Foreign Exchange and Foreign Trade, p.498

4. Legal Framework: From FERA to FEMA (intermediate)

To understand why India's currency convertibility evolved, we must first look at the legal 'guardrails' that controlled foreign exchange. For decades, foreign exchange was treated as a controlled commodity in India due to its chronic scarcity. To manage this, the government enacted the Foreign Exchange Regulation Act (FERA), 1973. The philosophy of FERA was conservation—every cent of foreign currency had to be accounted for, and unauthorized possession was treated as a criminal offense. Under FERA, strict restrictions were placed on companies with more than 40% foreign ownership, and the regulatory environment was one of suspicion and control Vivek Singh, Money and Banking- Part I, p.67.

The 1991 economic reforms changed the landscape entirely. As India's foreign exchange reserves grew and the economy integrated with the world, the rigid 'policing' mindset of FERA became a hurdle for trade. Consequently, the Foreign Exchange Management Act (FEMA), 1999 (which came into effect in June 2000) replaced FERA. This wasn't just a name change; it was a paradigm shift from 'regulation' to 'management.' FEMA aimed to facilitate external trade and payments and promote the orderly development of the foreign exchange market. Most importantly, it moved foreign exchange violations from criminal law to civil law, where penalties replaced imprisonment in most cases Vivek Singh, Indian Economy [1947 – 2014], p.216.

This transition was essential for currency convertibility. While FERA acted as a closed door, FEMA acted as a revolving door—allowing regulated entry and exit of capital. Under FEMA, all companies incorporated in India are treated alike, regardless of their level of foreign ownership, and the complex import control regimes for raw materials and capital goods have been largely dismantled Vivek Singh, Indian Economy [1947 – 2014], p.216.

Feature	FERA (1973)	FEMA (1999)
Core Objective	Conservation of foreign exchange	Management and facilitation of trade
Legal Nature	Prohibitive and restrictive	Permissive and regulatory
Violations	Criminal offense (Jail possible)	Civil offense (Monetary penalty)
Philosophy	Police Mindset (Control)	Administrative Mindset (Management)

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.67; Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy [1947 – 2014], p.216

5. Foreign Investment Dynamics (FDI & FPI) (intermediate)

When we talk about capital moving across borders, we primarily look at two vehicles: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), which includes Foreign Institutional Investment (FII). The fundamental difference lies in the intent and nature of the investment. FDI is like buying a house to live in and improve; it represents a long-term commitment where the investor seeks a significant stake and active management control in a company. Conversely, FPI is like buying shares in a real estate fund; the investor is looking for financial returns (dividends or capital appreciation) without wanting to run the business. Indian Economy, Nitin Singhania, Balance of Payments, p.489

FDI typically enters through the primary market, meaning new shares are issued and fresh capital flows directly into the company to build factories, buy machinery, or expand operations. Because it involves physical assets and management roles, it is often "sticky"—it doesn't leave the country overnight. FPI, however, usually operates in the secondary market (the stock exchange), where ownership simply changes hands between investors without necessarily providing new capital to the company itself. Because FPI can be sold with a few clicks, it is often termed "hot money"—it flows in when the economy is booming and can exit rapidly during a crisis, creating volatility in the exchange rate. Indian Economy, Vivek Singh, Money and Banking- Part I, p.99

To facilitate these flows, specific instruments are used. For instance, overseas investors who want to invest in the Indian market without registering themselves directly with the regulator (SEBI) can use Participatory Notes (P-Notes). These are issued by registered FPIs to offshore investors, providing them a way to benefit from Indian stocks while remaining anonymous to the local regulator. Indian Economy, Nitin Singhania, Agriculture, p.285

Feature	Foreign Direct Investment (FDI)	Foreign Portfolio Investment (FPI)
Management	Active; investor appoints Board of Directors.	Passive; investor is a minority shareholder.
Market	Mostly Primary (new capital to company).	Mostly Secondary (trading existing shares).
Stability	High (Stable/Long-term).	Low (Volatile/"Hot Money").
Benefits	Brings technology, skills, and capital.	Brings capital and increases liquidity.

Sources: Indian Economy, Nitin Singhania, Balance of Payments, p.489; Indian Economy, Vivek Singh, Money and Banking- Part I, p.99; Indian Economy, Nitin Singhania, Agriculture, p.285

6. Capital Account Convertibility (CAC) Concept (exam-level)

To understand **Capital Account Convertibility (CAC)**, we must first distinguish between the two ways money moves across borders. While current account convertibility deals with the flow of goods and services (like buying a laptop from China or software services from India), the **Capital Account** records all international transactions of **assets** — things like stocks, bonds, and real estate Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.88. Therefore, CAC is the freedom to convert domestic currency into foreign currency for the purpose of acquiring these assets at market-determined rates Indian Economy, Nitin Singhania (ed 2nd 2021-22), Chapter 17, p.498. Unlike the Current Account, where the Indian Rupee is fully convertible, India follows a policy of **partial convertibility** on the Capital Account Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy [1947 – 2014], p.216. The logic is one of caution: if India allowed full CAC overnight, massive amounts of 'hot money' could leave the country during a global crisis, causing the Rupee to crash and destabilizing the entire economy. To manage this transition, the **S.S. Tarapore Committee** (1997 and 2006) laid out a clear roadmap. The committee argued that India should move toward "Fuller CAC" only after achieving certain **macroeconomic preconditions** to ensure the economy is resilient enough to absorb shocks Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.109.

Preconditions for Fuller Capital Account Convertibility:

Parameter	Requirement
Fiscal Deficit	Must be reduced (Tarapore suggested 3.5% of GDP) to ensure fiscal discipline.
Inflation	Must be low and stable to prevent currency volatility.
Banking Health	Gross NPAs (Non-Performing Assets) must be minimal to ensure a robust financial system.
External Debt	Must be managed at sustainable levels.

India has been moving toward this goal in phases. For instance, in 2020, the RBI introduced the **Fully Accessible Route (FAR)**, which removed ceilings for non-resident investments in specific Government securities — a significant step toward making the capital account more open Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.109.

Sources: Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.88; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Chapter 17: India’s Foreign Exchange and Foreign Trade, p.498; Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy [1947 – 2014], p.216; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.109

7. Tarapore Committees and the Roadmap to Fuller CAC (exam-level)

When we talk about Capital Account Convertibility (CAC) in India, the most authoritative voice is that of the S.S. Tarapore Committees. Appointed by the Reserve Bank of India (RBI), these committees were tasked with creating a roadmap for moving India from a restricted regime to a system where capital can flow freely across borders. Unlike current account convertibility (which India achieved in 1994), CAC is much riskier because it allows for massive shifts in investment and debt that can destabilize a developing economy if not managed carefully.

The first Tarapore Committee (1997) laid down the "first principles" of this transition. It argued that CAC is not an event but a process. Instead of suggesting an immediate switch, the committee proposed a three-year roadmap based on strict macroeconomic preconditions. The logic was simple: if your house (the economy) is on fire, opening the doors (CAC) will only let the wind make the fire grow. To prevent capital flight, the committee recommended that the government first achieve stability in key areas:

• Fiscal Consolidation: Reducing the Gross Fiscal Deficit to around 3.5% of GDP.
• Inflation Control: Keeping the average inflation rate between 3-5% to maintain the rupee's value.
• Banking Health: Reducing the Non-Performing Assets (NPAs) of the banking system to below 5% and lowering the Cash Reserve Ratio (CRR).
• Foreign Exchange Reserves: Ensuring enough reserves to cover at least six months of imports.

Following the 1997 report, the Asian Financial Crisis broke out, which served as a cautionary tale for India. Consequently, a second committee was formed—the 2006 Committee on Fuller Capital Account Convertibility. Notice the change in terminology from "Full" to "Fuller"; this reflected a more cautious, calibrated approach. As noted in Indian Economy by Nitin Singhania, Chapter 17, p.499, this report provided a detailed five-year roadmap (2006-2011) and emphasized that while the goal is liberalisation, the RBI must retain the power to intervene during times of extreme volatility to protect the economy.

Aspect	1997 Committee	2006 Committee
Primary Focus	Establishing the three-year roadmap and preconditions.	Moving toward "Fuller" CAC with a focus on institutional strengthening.
Key Fiscal Target	Fiscal Deficit to be reduced to 3.5%.	Reinforced fiscal discipline under the FRBM Act framework.
Outcome	Implementation paused due to the Asian Financial Crisis.	Led to gradual relaxation of limits on individual and corporate investments abroad.

Sources: Indian Economy by Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.499

8. Solving the Original PYQ (exam-level)

Review the concepts above and try solving the question.