##ification and liberalisation process. • fifth, as a general rule, genuine hedging of exposures under specified conditions is allowed. this consistent approach has lent credibility to the liberalisation process of both current and capital account transactions. in 1997, the tarapore committee on capital account convertibility ( cac ), constituted by the reserve bank, had indicated the preconditions for capital account convertibility. the three crucial preconditions were fiscal consolidation, a mandated inflation target and, strengthening of the financial system. drawing from the lessons of international experience, the committee noted that, in general, countries which initiated the move to cac on the basis of strong fundamentals were able to modulate the pace of instituting cac without undertaking large and dramatic shifts in the stance of macro economic policies. furthermore, these countries were less vulnerable to backtracking and the reimposition of controls in the face of exogenous shocks. in fact, the pursuit of reforms in other areas by these countries instilled confidence in the process of opening up of the capital account. countries with weak initial conditions have to adopt drastic measures in macro economic policies to facilitate the move to cac. some of these countries had to face interruptions and reintroduction of capital controls in the evolution of cac. in this context, i recall the observations of former governor, dr. bimal jalan and i quote, “... it must be understood that merely by lifting all capital controls, the markets of a developing country do not get as deeply integrated as a developed country ’ s markets. as such, each country would need to decide on its own path of capital account liberalization with regard to the timing and sequencing ”. the tarapore committee had also recommended change in the legislative framework governing foreign exchange transactions. accordingly, the foreign exchange regulation act ( fera ) which formed the statutory basis for exchange control in india was repealed and replaced by the new foreign exchange management act ( fema ) with effect from june 2000. the philosophical approach has shifted from that of conservation of foreign exchange to one of facilitating trade and payments as well as developing orderly foreign exchange market. this definitive shift in the objectives of foreign exchange management could be seen in the preamble to the new legislation. fema provided a de jure status to the shift in the policies with regard to the external sector reforms that began in 1990 - 91. further and more importantly, fema has diluted the rigorous enforcement provisions which were

. tarapore ) in december 2003 to address the difficulties faced by common persons in getting services from the banking sector. the reserve bank also advised banks to constitute an adhoc committee in each of them to review the procedure followed by them and to ensure that the instructions issued by the reserve bank are properly implemented. the cppaps, in its report no. 1 on exchange controls relating to the individuals, focused its attention on the assessment of facilities and procedures for both residents and non - resident individuals. the recommendations of the cppaps have been examined by the reserve bank and a number of steps had already been taken for their implementation, securing procedural simplification. further, measures have been initiated to institutionalise the system for procedural simplification in respect of foreign exchange transactions both at the level of the reserve bank and authorised dealers. in recent years, the reserve bank has delegated authorities to authorised dealers to such an extent that there is hardly any need for the individuals to approach the reserve bank for any approval. however, we have come across instances where the liberalised procedures have not permeated to the grassroot level in banks possibly due to lack of knowledge about various rules and regulations and also procedures to be followed for various types of forex transactions. while, we at the reserve bank would continue our efforts to improve the customer service rendered at the reserve bank and banks, i request that any difficulties in getting facilities which are permissible may be brought to the notice of the reserve bank. way ahead india ’ s capital account liberalisation measures have been largely effective. among other factors, suitable policy measures in respect of the external sector insulated india from the 1997 asian crisis. we have moved forward gradually towards capital account convertibility with a broad reform agenda that encompasses trade, competition, reform of the financial system and industrial restructuring. as evident from various economic indicators, the liberalisation process that has been underway for some time created a more competitive environment for indian industry vis - a - vis what existed earlier. consequently, the indian companies have upgraded their technology and expanded to more efficient scales of production and refocused their activities to areas of competence. increasingly, indian companies are looking to become global players. reform measures in the external sector, including dismantling of exchange control have been a contributor to this development. we would continue to participate actively in the process of economic and financial globalisation, accelerate domestic economic reform and continue with our firm commitment to liberalisation so as to serve the needs of economic