What do you understand by currency convertibility? Do you think India should have full capital account convertibility?

What do you understand by currency convertibility? Do you think India should have full capital account convertibility? 

Ans. The ease with which a country’s currency can be converted into gold or another currency. Convertibility is extremely important for international commerce. When a currency in inconvertible, it poses a risk and barrier to trade with foreigners who have no need for the domestic currency. For example, a government with low reserves of hard foreign currency often restrict currency convertibility because the government would not be in a position to intervene in the foreign exchange market (i.e. revalue, devalue) to support their own currency if and when necessary. In case India goes for full capital account convertibility, it is creating following problems. 

(a) There is instability in international arena and it will also increase ups and downs in India. 

(b) The rising prices and the appreciation of the rupee are adversely affecting India’s exports and BOT. 

(c) The government is yet to compensate the companies which are making severe losses due to heavy subsidies on oil and these deferred payments have been ignored while estimating deficits. 

(d) Poor infrastructure and socio-economic backwardness act as deterrents to inflow of FDI.