UPSC Prelims 2007 Q100: Indian Economy – External Sector & Balance Of Payments
- (a) Special Economic Zones
- (b) Fuller capital account convertibility
- (c) Foreign exchange reserves
- (d) Effect of oil prices on the Indian economy
Answer: (b) Fuller capital account convertibility
Explanation
Tarapore Committees — Capital Account Convertibility
| Committee | Year | Chair | Topic |
|---|---|---|---|
| First Tarapore Committee | 1997 | S.S. Tarapore (ex-RBI Deputy Governor) | Roadmap to Capital Account Convertibility (CAC) |
| Second Tarapore Committee | 2006 | S.S. Tarapore | Fuller Capital Account Convertibility (FCAC) |
Capital account convertibility = freedom to convert rupees into foreign currency (and back) for capital transactions — buying foreign assets, investing abroad, borrowing.
Pre-conditions set by the committee: low fiscal deficit, low inflation, low bank NPAs, adequate forex reserves.
India has full current account convertibility (since 1994) but only partial capital account convertibility.
Answer: (b) Fuller capital account convertibility.
Why each option is right or wrong
- (a) Incorrect. SEZ policy is linked to the SEZ Act, 2005, not Tarapore.
- (b) CORRECT. The Tarapore Committees (1997, 2006) dealt with (fuller) capital account convertibility.
- (c) Incorrect. Forex reserve management was looked at by other panels (e.g., the C. Rangarajan BoP committee).
- (d) Incorrect. Tarapore did not study oil-price effects.
Key point
Tarapore Committee = Capital Account Convertibility (1997) and Fuller CAC (2006). India: full current account, partial capital account.
Remember
Tarapore Committee = fuller capital account convertibility.
Common mistakes
- Thinking India has full capital account convertibility — it is still partial.
- Confusing current account convertibility (trade, remittances — full since 1994) with capital account.
- Mixing up the Tarapore and Rangarajan committees on external sector issues.
Exam tip
Tarapore = 'T' for 'Transfer capital freely'. Two reports: 1997 (CAC) and 2006 (FCAC).
Sources
- RBI — Report of the Committee on Fuller Capital Account Convertibility (2006)
- RBI — Report of the Committee on Capital Account Convertibility (1997)
- NCERT Class XII — Introductory Macroeconomics, Ch 6 (Open Economy)