Deemed exports as defined in the export
and import policy 1997-2002 means those
transactions in which the goods supplied
do not leave the country and the
supplier in India receiver the payment for
the goods go out of India to treat them
as deemed export.
Different categories of supplies
regarded as deemed exports
Supply of goods against licenses issued
under the duty exemption scheme.
Supply of goods to units located in export
processing zones or software technology
parks or export oriented units.
Supply of capital goods to holders of licenses
issued under the export promotion capital
goods (EPCA) schemes.
Supply of capital goods and spares to
fertilizer plants if the supply is made under
the procedure of international competitive
Supply of goods to any project or purpose
in respect of which the ministry of Finance
by a notification permits the import of such
goods at zero customs duty coupled with
the extension of benefits to domestic
Supply of marine Freight containers by
100% (Domestic freight containers
manufacturers) to shipping companies
including shipping corporation of India
provided the said containers are exported
out of India within 6 months or such further
period as permitted by customs.
Free convertibility of currency means that
the currency can be exchanged for any
other convertible currency without any
restriction at the market determined
Convertibility of rupee means that the
rupee can be freely converted in to dollar,
yen, pound, euro etc. and vice versa at the
rates of exchange determined by the
demand and supply forces.
A currency can be convertible on trade
account. If an exporters dollar earnings
can be freely converted in to rupees at a
market determined exchange rate.
If the free transformation of domestic
currency in to foreign currencies is
permitted for invisible transactions a
currency is said t be convertible on current
The capital account involves capital
outflows and capital inflows the rupee can
be said to be convertible on capital
account when the freedom to change
currencies applies to all international
transactions the currency is said to be full
Current account convertibility
Current account convertibility is defined as
the freedom to buy or sell foreign
exchange for the following international
All payments due in connection with foreign
trade other current business including
services and normal short term banking and
Payment due as interest on loans and as net
income from other investments.
Payments of moderate amount of amortization
of loans or for depreciation of direct
Moderate remittances for family living
Full convertibility announced on current
account on August 19, 1994.
Liberalized Exchange Rate
Mechanism System (LERMS)
This system was announced by the finance
minister in the budget for 1992-93.
This system introduce the partial convertibility
Under this system a dual exchange rate
was fixed under which 40%of foreign
exchange earnings were to be
surrendered at the official exchange rate
which the remaining 60% were to be
converted at a market determined rate.
The foreign exchange surrendered at the
official rate was to be used for import of
Unified Exchanged Rate System
This system was announced in the 1995-
94 budget which resulted in the full
convertibility of rupee on current account.
Under this exchange rate system the
60:40 ration was extended to 100 percent
100 percent conversion was extended for :
a) almost the merchandise trade
b) all receipts whether on current
account or capital account o f balance of
payments but not all payments.
The official RBI rates also stayed on for
the conversion of items not permitted
under the unifies exchange rate.
Capital account convertibility (CAC)
Capital account convertibility implies the
movement of funds in and out of country
without restrictions .
Convertibility of rupee on capital account
transactions which can be expected to
stimulate greater inflow of foreign
The major risk associated with capital
account convertibility is flight of capital i.e..
Withdrawal of foreign investment from the
The Tarapore committee defined Capital
Account Convertibility as
“the freedom to convert local financial
assets with foreign financial assets and
vice versa at market determined exchange
Precondition for CAC
The Tarapore committee recommended that
before adopting CAC, India should fulfill
three crucial preconditions.
Fiscal deficit should be reduced to 3.5%
The Government should fire the annual
inflation target between 3 and 5 percent.
The Indian financial sector should be
Benefits of CAC
CAC helps in the development of financial
CAC helps in boost the investment and
It allows domestic residents to invest in
It help the domestic residents to reduce
risk factor in their investments.
It facilitates the specialization in financial
Disadvantages of CAC
CAC facilitates withdrawal of foreign
investment from the country.
Companies based in India will find it more
difficult in mobilizing capital from the
International trade & financial
M.K.Bhat – Ane Books Pvt. Ltd.- New