UPSC Prelims 2000 Q29: Indian Economy – External Sector & Balance Of Payments
- (a) I alone
- (b) III alone
- (c) I and II
- (d) I, II and III
Answer: (a) I alone
Explanation
How far the Indian rupee was convertible in 2000
| Account | Convertibility |
|---|---|
| Current account (trade, services, remittances) | Fully convertible since August 1994 (IMF Article VIII) |
| Capital account (investment, borrowing) | Not fully convertible — Tarapore Committee (1997) set a phased path |
| Gold | No — the rupee is not convertible into gold |
India moved to full convertibility on the current account in August 1994, when it accepted the obligations of Article VIII of the IMF Articles of Agreement.
This means rupees can be freely exchanged for foreign currency for trade in goods and services and for remittances.
The capital account was only partly opened; the Tarapore Committee (1997) proposed a gradual path to capital account convertibility, which has not been completed.
The rupee is not convertible into gold either; gold convertibility ended worldwide with the collapse of the Bretton Woods system.
So only statement I is correct.
Answer: (a) I alone.
Why each option is right or wrong
- (a) CORRECT. The rupee is fully convertible only on the current account.
- (b) Incorrect. The rupee cannot be converted into gold.
- (c) Incorrect. Capital account convertibility is still partial.
- (d) Incorrect. Neither capital account nor gold convertibility exists.
Key point
Current account convertibility: August 1994; capital account: only partial (Tarapore Committees 1997 and 2006).
Remember
Rupee: current account convertible since 1994; capital account partial.
Common mistakes
- Assuming the 1991 reforms made the rupee fully convertible on both accounts.
- Confusing the partial convertibility of 1992 (LERMS) with full current account convertibility.
- Thinking a currency backed by the RBI's gold reserves is convertible into gold.
Exam tip
Current yes, capital partly, gold never.
Sources
- Reserve Bank of India — Report of the Committee on Capital Account Convertibility (S.S. Tarapore), 1997
- Ministry of Finance — Economic Survey 1999-2000 (indiabudget.gov.in)