Ppp, Transfer Paymnts

8/3/2019 Ppp, Transfer Paymnts

1/5

currency to deposit ratio the proportion of currency that people in the economy want to hold relative to theirdeposits; it equals currency divided by deposits.

Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based onrelative price levels of two countries. The idea originated with the School of Salamanca in the

16th century[1]

and was developed in its modern form by Gustav Cassel in 1918.[2]

The concept

is founded on the law of one price; the idea that in absence of transaction costs, identical goodswill have the same price in different markets.

In its "absolute" version, the purchasing power of different currencies is equalized for a given

basket of goods. In the "relative" version, the difference in the rate of change in prices at homeand abroadthe difference in the inflation ratesis equal to the percentage depreciation or

appreciation of the exchange rate.

The best-known and most-used purchasing power parity exchange rate is the Geary-Khamisdollar(the "international dollar").

PPP exchange rate (the "real exchange rate") fluctuations are mostly due to different rates ofinflation between the two economies. Aside from this volatility, consistent deviations of themarket and PPP exchange rates are observed, for example (market exchange rate) prices of non-

traded goods and services are usually lowerwhere incomes are lower. (A U.S. dollarexchangedand spent in India will buy more haircuts than a dollar spent in the United States). Basically, PPPdeduces exchange rates between currencies by finding goods available for purchase in both

currencies and comparing the total cost for those goods in each currency.[3]

In other words, the exchange rate adjusts so that an identical good in two different countries has the same price whenexpressed in the same currency.

For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange

rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order forthe exchange to be equivalent to each currency's purchasing power.

The relative version of PPP is calculated as:

Where:"S" represents exchange rate of currency 1 to currency 2"P1" represents the cost of good "x" in currency 1"P2" represents the cost of good "x" in currency 2

TRANSFER PAYMENTS

One-way payment ofmoney for which no money, good, or service is received in exchange. Governments use such

payments as means ofincome redistribution by giving out money under social welfareprograms such as social security,

old age or disability pensions, student grants, unemployment compensation, etc. Subsidiespaid to exporters, farmers,

manufacturers, however, are not considered transfer payments. Transfer payments are excluded in computinggross

national product.


2/5

Money given by the government to its citizens. Examples includeSocial Security, unemployment compensation, welfare,

and disabilitypayments.

CAC (Capital Account Convertibility) in the Indian

Economy

CAC (Capital Account Convertibility) for Indian Economy refers to the abolition of

all limitations with respect to the movement of capital from India to different countries

across the globe. In fact, the authorities officially involved with CAC (Capital Account

Convertibility) forIndian Economy encourage all companies, commercial entities and

individual countrymen for investments, divestments, and real estate transactions in India

as well as abroad.It also allows the people and companies not only to convert one

currency to the other, but also free cross-border movement of those currencies, without

the interventions of the law of the country concerned.

Following are the pre-requisites forCapital Account

Convertibility in India:

The Tarapore Committee appointed by the Reserve Bank ofIndia (RBI) was meant for

recommending methods of converting the Indian Rupee completely. The report

submitted by this Committee in the year 1997 proposed a three-year time period (1999-

2000) for total conversion of Rupee. However, according to the Committee, this was

possible only when the following few conditions are satisfied:

The average rate of inflation should vary between 3% to 5% during the debt-servicing

the gross fiscal deficit to the GDP ratio by 3.5% in 1999-2000

Evolution ofCAC in India economic and financial scenarios:


3/5

In 1994 August, the Indian economy adopted the present form of Current Account

Convertibility, compelled by the International Monetary Fund (IMF) Article No. VII, the

article of agreement. The primary objective behind the adoption of CAC in India was to

make the movement of capital and the capital market independent and open. Thiswould exert less pressure on the Indian financial market. The proposal for the

introduction of CAC was present in the recommendations suggested by the Tarapore

Committee appointed by the Reserve Bank ofIndia.

Reasons for the introduction ofCAC in India:

The logic for the introduction of complete capital account convertibility in India,

according to the recommendations of the Tarapore Committee, is to ensure total

financial mobility in the country. It also helps in the efficient appropriation or distribution

of international capital in India. Such allocation of foreign funds in the country helps in

equalizing the capital return rates not only across different borders, but also escalates

the production levels. Moreover, it brings about a fair allocation of the income level in

India as well.

The forecasts made by the Tarapore Committee regarding

Indian CAC are as follows:

age inflation rate of 3% to 5% will exist for a three-year time period, from1997-98 and 1999-2000.

ng assets will experience a decline to 12%, 9% and 5% by the years 1997-98, 1998-99 and 1999-

with respect to the total or aggregate advances.-98, there will be a complete deregulation of the structure of interest rate.

eficit will fall from 4.5% in 1997-98 to 4.0% in 1998-99 and further to 3.5 % in 1999-2000, with

P.


4/5

Benefits and drawbacks ofCAC:

To sum up, CAC is concerned about the ownership changes in domestic or foreign

financial assets and liabilities.It also represents the formation and liquidation of financial

claims on or by the remaining world. It enables relaxation of the Capital Account, which

is under tremendous pressure from the commercial sectors ofIndia. Along with the

financial capitalists, the reputed commercial firms in India jointly derive and enjoy the

benefits of the CAC policy, which speculate the stock markets through investments. In

fact, the CAC policy in India is pursued primarily to gain the speculator's and the

punter's confidences in the stock markets.

However, CAC does not serve the purposes of the real sectors ofIndian economy, like

eradication of poverty, escalation of the employment rates and other inequalities. In spite

of CAC being present in Indian economy, there will be a co-existence of financial crises.

Despite several benefits, CAC has proved to be insufficient in solving the Indian

financial crises, the complete solution of which lies in having a regulated inflow of capital

into the economy.

Convertibility can be related as the extent to which a country's regulations allow free flow of money

into and outside the country.

For instance, in the case of India till 1990, one had to get permission from the Government or RBI as the

case may be to procure foreign currency, say US Dollars, for any purpose. Be it import of raw material,

travel abroad, procuring books or paying fees for a ward who pursues higher studies abroad. Similarly,

any exporter who exports goods or services and brings foreign currency into the country has to

surrender the foreign exchange to RBI and get it converted at a rate pre-determined by RBI.

After liberalization began in 1991, the government eased the movement of foreign currency on trade

account. I.e. exporters and importers were allowed to buy and sell foreign currency, as long as the items

that they are exporting and importing were not in the banned list. They need not get permission on a

CASE TO CASE basis as was prevalent in the earlier regime. This was the first concrete step the economy

took towards making our currency convertible on trade account.

In the next two to three years, government liberalized the flow of foreign exchange to include items like


5/5

amount of foreign currency that can be procured for purposes like travel abroad, studying abroad,

engaging the services of foreign consultants etc. This set the first step towards getting our currency

convertible on the current account. What it means is that people are allowed to have access to foreign

currency for buying a whole range of consumable products and services. These relaxations coincided

with the liberalization on the industry and commerce front - which is why we have Honda City cars, Mars

chocolate bars and Bacardi in India.

There was also simultaneous relaxation on the restriction on the funds that foreign investors can bring

into India to invest in companies and the stock market in the country. This step led to partial

convertibility on the Capital Account.

"Capital Account convertibility in its entirety would mean that any individual, be it Indian or foreigner

will be allowed to bring in any amount of foreign currency into the country and take any amount of

foreign currency out of the country without any restriction."

Indian companies were allowed to raise funds by way of equities (shares) or debts. The fancy terms like

Global Depository Receipts (GDRs), Euro Convertible Bonds (ECBs), Foreign currency syndicated loans

became household jargons of Indian investors. Listing in Nasdaq or NYSE became new found status

symbols for Indian companies. However, Indian companies or individuals still had to get permission on a

case to case basis for investing abroad.

In 2000, the forex policy was further relaxed that allowed companies to acquire other companies abroad

without having to go through the rigmarole of getting permission on a case to case basis. Further, Indian

debt based mutual funds were also allowed to invest in AAA rated government /corporate bonds

abroad. This got further relaxed with Indians being allowed to hold a portion of their foreign exchange

earnings as foreign currency, subject to a limit in the recent monetary policy in October 2002.

In general, restrictions on foreign currency movements are placed by developing countries which have

faced foreign exchange problems in the past is to avoid sudden erosion of their foreign exchange

reserves which are essential to maintain stability of trade balance and stability in their economy. With

India's forex reserves increasing steadily, it has slowly and steadily removed restrictions on movement

of capital on many counts.

The last few steps as and when they happen will allow an individual to invest in Microsoft or Intel shares

that are traded on Nasdaq or buy a beach resort on Bahamas without any restrictions

Read more: http://wiki.answers.com/Q/What_is_rupee_convertibility#ixzz18Yrk8vMZ

Documents

Ppp, Transfer Paymnts