Direction (Q. 1-8): Read the passage carefully and answer the questions given below it.
In the era of globalisation, most transactions taking place between two countries need that one currency should be converted into another. Any convertibility can be related as the extent to which a country's regulations allow free flow of money into and outside the country. It essentially means the ability of residents and non-residents to exchange domestic currency without any limits for whatever legitimate transactions.
For example, Indian tourist or importer or student willing to go abroad for studies needs to convert Rupee into Dollars or an exportergetting Dollars converted into Rupees. The rate at which the conversion should take place usually depends upon the pohcy of the central bank of the country, balance of payments and strength of economy, among other factors. In India, Convertibility of Rupee has been dealt at two levels, namely Current Account Convertibility and Capital Account Convertibility. Current account convertibility refers to currency convertibility required in case of transactions of all imports and exports of merchandise and services, money transfers, remittances, govemment grants. Current account includes all transactions which add to or use the national income.
In India, most current account transactions have been freed from controls over a period of time. Now, rupee is fully convertible on the current account, which means movement of funds in and out of India without any restrictions and permissions for current intemational transactions.
Since 1991, Govemment has initiated a series of policy changes with the objective of better integration of Indian economy with that of the world. Rupee was devalued by about 20 per cent in July 1991. A system of exim scrip was introduced, by which exporters were able to import goods equal to 30 to 40 per cent of their export earnings.
The system was soon replaced by a system of partial convertibility of Rupee on the current account. It was also termed as Liberalised Exchange Rate Management System (LERS) and was instituted in March 1992. Under the new system, all foreign exchange remittances, whether earned through exports of goods and services or remittances, can be converted into rupees in the following manner: 40% of the foreign exchange remitted can be converted at the official exchange rate while the remaining 60% at a market-determined rate. Foreign exchange surrendered at official exchange rate was to be available to meet foreign exchange requirements for essential imports such as oil.
Current account includes as regard current account convertibility