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 is inconvertible, it poses a risk and barrier to trade with foreigners who have no need for the domestic currency.The ability to exchange money for gold or other currencies. Some governments which do not have large reserves of hard currency foreign reserves try to restrict currency convertibility, since they are not in a position to handle large currency market operations to support their currency when necessary.The state of or the ease with which a currency may be exchanged for a foreign currency. Currency convertibility is vitally important in the foreign exchange market; higher convertibility means that a currency is more liquid and, therefore, less difficult to trade. Factors affecting convertibility include the availability of foreign currency reserves in a given country and domestic regulations seeking to protect local investors from bad investment decisions in, say, a currency undergoing a period of hyperinflation. Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa at market determined rates of exchange.foreign exchange transactions.Currency convertibility means the freedom to convert one currency into other internationally accepted currencies. There are two popular categories of currency convertibility, namely : Convertibility for current international transactions; and Convertibility for international capital movements. Currency convertibility implies the absence of exchange controls or restrictions on foreign exchange transactions.1. ADVANTAGES

Encourages export: - Exporters are motivated to increase their exports since there is possibility of making more profits under currency convertibility conditions. As a result of convertibility on current account, higher profits will be earned since market exchange rate will give higher returns as compared to the officially fixed exchange rate. From the given exports, they earn more foreign exchange.

Encourage Import Substitution: - since the market determined exchange rate is higher than the officially fixed exchange rate, imports become more expensive. This makes countries to go in for import substitution.

Incentives to Send Remittances from Abroad:- Indian workers employed abroad & NRIs find it convenient to send remittances of foreign exchange without hassle. This also encouraged illegal remittances like hawala money & smuggling.

Self-adjusting Process in the Correction of Surplus or Deficits in Balance of Payments:- In case, a country faces a deficit due to overvalued exchange rate, the currency of the country will depreciate. This will encourage exports by lowering the prices & discourages imports by raising their prices. In this manner the deficit or surplus in the BoP gets corrected without the intervention of the government.

Countries are Enabled to specialize in the Production of Goods for which they have a Comparative Advantage:- each country will be able to engage in the production of goods in accordance with their comparative advantage & resource endowments. When there is currency convertibility, market exchange rate truly reflects the purchasing power of their currencies which is based on the prices & costs of goods in different countries. In a competitive environment, lower prices of goods which reflect the comparative advantage will enable countries to increase exports. Thus currency convertibility will lead to specialization & international trade on the basis of comparative advantage. This will be beneficial for all countries in trade.

Integration of World Economy:- currency convertibility enables better integration of the world economy. The easy availability of foreign exchange helps in the growth of trade & increased capital flows between countries. This will enables the growth of all countries which is important in the context of globalization.

It forces the financial sector to be become more efficient, more disciplined, and much strongerIt paves the way for companies to access funds from outside without hindrance. It makes it far easier for foreign companies to invest in India1. DISADVANTAGES Currency convertibility can give rise to problems of inflation in domestic economy. The market determined exchange rate is generally higher than the officially fixed exchange rate. This leads to a rise in prices of essential imports which can results in a situation of cost push inflation in an economy.If the people monitoring is not done, convertibility can results in the depreciation of the domestic currency. Undue depreciation of a currency can make people loose confidence in the currency itself. This can adversely affect the trade & capital flows of a country.Under capital account convertibility, a country is given the freedom to transact in financial assets with foreign countries without restrictions. Such an arrangement is to enable increased investment activities. But there are risks attached to it. A very likely possibility is that of capital flight at the first sign of an internal economic problem.The short-term capital flights termed as hot money transfers can destabilize an economy unless precautionary or counter measures are taken to achieve stability.Speculative activities may increase under free convertibility, making the exchange rates highly volatile. Speculation can lead to depreciation of currencies & flight of capital. This is proved by the experience of the South East Asian countries like Thailand, Malaysia, in the year 1997-199, which experienced severe depreciation of currency & capital flight.

India is moving very cautiously towards capital account convertibility due to various risks which can create macroeconomic imbalance in the in the economy. Though the rupee is not freely convertible on the capital account, in certain transactions full convertibility prevails.Economic reforms in India have accelerated growth, enhanced stability and strengthened both external and financial sectors. Our trade as well as financial sector is already considerably integrated with the global economy. India's cautious approach towards opening of the capital account and viewing capital account liberalization as a process contingent upon certain preconditions has stood India in good stead.It is interesting to note the difference between Current Account convertibility and Capital Account convertibility

Current Account convertibility means the freedom to convert one currency into other internationally accepted currencies wherein the exporters and importers where allowed a free conversion of rupee. But still none was allowed to purchase any assets abroad. Capital Account Convertibility means that rupee can now be freelyconvertibleinto any foreign currencies for acquisition of assets like shares, properties and assets abroad. Further, the banks can accept deposits in any currency.Capital Account Convertibility (CAC) is the freedom to convert local financial assets into foreign financial assets at market determinedexchange rates. Referred to as Capital Asset Liberation in foreign countries, it implies free exchangeability of currency at lower rates and an unrestricted mobility of capital. India presently has current account convertibility, which means thatforeign exchangeis easily available for import and export for goods and services. India also has partial capital account convertibility; such that an Indian individual or an institution can invest in foreign assets up to $25000. Foreigners can also invest along the same lines. At present, there are limits on investment by foreign financial investors and also caps on FDI ceiling in most sectors, for example, 74% inbankingand communication, 49% in insurance, 0% in retail, etc.Given the changes that have taken place over the last two decades, however, there is merit in moving towards fuller capital account convertibility within a transparent framework. There is, thus, a need to revisit the subject and come out with a roadmap towards fuller Capital Account Convertibility based on current realities. In consultation with the Government of India, the Reserve Bank of India has appointed a committee to set out the framework for fuller Capital Account Convertibility.TheFirst Tarapore Committeewas set up by the RBI in 1997 tostudythe implications of executing CAC in India. It recommended that the before CAC is implemented, the fiscal deficit needs to be reduced to 3.5% of the GDP, inflation rates need to be controlled between 3-5%, the non-performing assets (NPAs) need to be brought down to 5%,CashReserve Ratio (CRR) needs to be reduced to 3%, and a monetary exchange rate band of plus minus 5% should be instituted. However, most of the pre-conditions werent entirely fulfilled. Thus, CAC was abandoned for the moment.However due to renewed optimism in the year 2006 as some of the targets suggested by theFirst Tarapore Committee were achieved along with consolidation of banks, a strong export front, large forex reserves amounting to $300 billion and high growth rates instilled some hope making way for setting up of aSecond Tarapore Committee to look into the PMs proposal to reevaluate the earlier stand.Second Tarapore Committee Recommendations:1. The ceiling for External Commercial Borrowings (ECB) should be raised for automatic approval.2. NRI should be allowed to invest in capital markets.3. NRI deposits should be given tax benefits.4. Improvement of the banking regulations5. FII should be prohibited from investing fresh money through Participatory notes.6. Existing PN holders should be given an exit route to phase out completely the PN notes.At present the rupee is fully convertible on the current account, but only partially convertible on the capital account.CAC can be beneficial for a country as the inflow of foreign investment increases and the transactions are much easier and occur at a faster pace. CAC also initiates risk spreading through diversification of portfolios. Moreover, countries gain access to newer technologies whichtranslateinto further development and higher growth rates.Even though CAC seems to have many advantages, in reality, it can actually destabilize the economy through massive capital flight from a country. Not only are there dangerous consequences associated with capital outflow, excessive capital inflow can cause currency appreciation and worsening of the Balance of Trade. Furthermore, there are overseas credit risks and fears of speculation. In addition, it is believed that CAC increases short term FIIs more than long term FDIs, thus leading to volatility in thesystem.Hence, India still needs to work on its fundamentals of providing universal qualityeducationand health services and empowerment of marginalized groups, etc. The growth strategy needs to be more inclusive. There is no point trying to add on to the clump at the top of the pyramid if the base is too weak. The pyramid will soon collapse! Thus, before opening up to financial volatility through the implementation of FCAC, India needs to strengthen its fundamentals and develop a strong base.Concluding it can be said that India should either wait for a while or implement CAC in a phased, gradual and cautious manner as enshrined in the present policy.CAC (Capital Account Convertibility) for Indian Economyrefers 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) for Indian 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.Ads by NewPlayerAd OptionsFollowing are the pre-requisites for Capital Account Convertibility in India:The Tarapore Committee appointed by the Reserve Bank of India (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: Theaverage rateof inflation should vary between 3% to 5% during thedebt-servicing time Decreasing the gross fiscal deficit to the GDP ratio by 3.5% in 1999-2000Evolution of CAC in India economic and financial scenarios: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. This would 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 of India.Ads by NewPlayerAd OptionsReasons for the introduction of CAC 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.Top of FormSign-up for ourBottom of FormThe forecasts made by the Tarapore Committee regarding Indian CAC are as follows: A prescribed average inflation rate of 3% to 5% will exist for a three-year time period, from1997-98 and 1999-2000. The non-performing assets will experience a decline to 12%, 9% and 5% by the years 1997-98, 1998-99 and 1999-2000 respectively, with respect to the total or aggregate advances. By the years 1997-98, there will be a complete deregulation of the structure of interest rate. The gross fiscal deficit will fall from 4.5% in 1997-98 to 4.0% in 1998-99 and further to 3.5 % in 1999-2000, with respect to the GDP.Benefits and drawbacks of CAC: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 of India. 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 of Indian 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.1. TYPES OF CURRENCY CONVERTIBILITY1. Capital Account Convertibility :- Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa. Convertibility in that sense is the obverse of controls or restrictions on currency transactions. While current account convertibility refers to freedom in respect of payments and transfers for current international transactions, capital account convertibility (CAC) would mean freedom of currency conversion in relation to capital transactions in terms of inflows and outflows. Article VIII of the International Monetary Fund (IMF) puts an obligation on a member to avoid imposing restrictions on the making of payments and transfers for current international transactions. Members may cooperate for the purpose of making the exchange control regulations of members more effective. Article VI (3), however, allows members to exercise such controls as are necessary to regulate international capital movements, but not so as to restrict payments for current transactions or which would unduly delay transfers of funds in settlement of commitments.

Advantages of CAC More capital available to the country, and the cost of capital would decline. The freedom to trade in financial assets. Difficult for a country to follow unwise macroeconomic policies. Tax levels would move closer to international levels . It will grow competition among financial institutions.

Disadvantages of CAC It could lead to the export of domestic savings. Expose the economy to larger macroeconomic instability. Premature liberalization could initially stimulate capital inflows that would lead to appreciation of real exchange rate and thereby destabilize an economy undergoing the fragile process of transition and structural reform. It may bring low quality investment . It may generate the financial bubble.

1. Current Account Convertibility :- Current account convertibility allows residents to make and receive trade-related payments, i.e. receive foreign currency for export of goods and services and pay foreign currency for import of goods and services like travels, medical treatment and studies abroad. Current account convertibility allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans. In other words, it allows residents to make and receive trade-related payments -- receive dollars (or any other foreign currency) for export of goods and services and pay dollars for import of goods and services, make sundry remittances, access foreign currency for travel, studies abroad, medical treatment and gifts, etc.Current account convertibility refers to freedom in respect of Payments and transfers for current international transactions. In other words, if Indians are allowed to buy only foreign goods and services but restrictions remain on the purchase of assets abroad, it is only current account convertibility. As of now, convertibility of the rupee into foreign currencies is almost wholly free for current account i.e. in case of transactions such as trade, travel and tourism, education abroad etc.The government introduced a system ofPartial Rupee Convertibility(PCR) (Current Account Convertibility) on February 29,1992 as part of the Fiscal Budget for 1992-93. PCR is designed to provide a powerful boost to export as well as to achieve as efficient import substitution. It is designed to reduce the scope for bureaucratic controls, which contribute to delays and inefficiency. Government liberalized the flow of foreign exchange to include items like amount of foreign currency that can be procured for purpose like travel abroad, studying abroad, engaging the service of foreign consultants etc. What it means that people are allowed to have access to foreign currency for buying a whole range of consumables products and servicesCurrent account convertibility is popularly defined as the freedom to buy or sell foreign exchange for:-a. The international transactions consisting of payments due in connection with foreign trade, other current businesses including services and normal short-term banking and credit facilitiesb. Payments due as interest on loans and as net income from other investmentsc. Payment of moderate amounts of amortization of loans for depreciation of direct investmentsd. Moderate remittances for family living expensese. Authorized Dealers may also provide exchange facilities to their customers without prior approval of the RBI beyond specified indicative limits, provided, they are satisfied about the bonafides of the application such as, business travel, participation in overseas conferences/seminars, studies/ study tours abroad, medical treatment/check-up and specialized apprenticeship training.9.4) PARTIAL CONVERTIBILITY OF RUPEEPartial convertibility of Rupee was started in 1992 for current account. In simple word, there is no control of Indian currency official. Any foreign company can do business and can go to his country with this profit after exchanging all Indian currency in their foreign currency. For example, According to its Directors Report, a public document filed with Indias Registrar of Companies, Google India Private Ltd reported revenues of Rs. 779.34 crore (around $172.03 million at current rates), over the 15 month period from Jan 2009 to March 2010. For the same period, it reported a profit after tax of 97.96 crore ($21.62 million), and received foreign exchange of Rs. 666.25 crore, with a foreign exchange out go of Rs. 304.24 crore. In this, example, we see that there is no our control our one foreign currency. From economic point of view, if any country has largest amount of other countries currency, that country will become economically sound. Suppose, if India has not USA dollars for exchanging Rs. 304.24 crore to Google India Pvt. Ltd, at that time, India has to take loan of same USA Dollars from USA and will pay interest on it. So, it will increase adverse balance of payment.

It is true, with partial convertibility of Rupees, investment in foreign country has become easy but it is also harmful for India, because same investment should be in India instead any other country. All companies think the benefit of their residential country from where they are operating their business. So, for India's interest, we have tomake some strict rules for stopping outflow of fund on the name of convertibility of rupee or liberalization.

1. The rupee has arrived. Long before the domestic currency gets the `convertible tag, its being freely accepted and exchanged in Singapore, Malaysia, Indonesia, Hong Kong, Sri Lanka and other countries. Till now, such transactions were confined to select departmental stores which are favourite of Indian tourists; now more and more shops, hotels and even money changers are willing to accept the local legal tender.

This means no double conversions, and therefore, extra cost while exchanging Indian rupees. This may not be quite legal since in the international money market, the rupee is still not a deliverable currency. Nonetheless, its acceptance is on the rise, thanks to growing trade with India and a surge in tourist inflows.

It has certainly made things easier for the Indian tourists who can simply carry rupees, and do away with travelers cheques. In most Asian countries, the nearest `money exchange shop will give them the local currency against rupees. Many feel the trend has picked with hints that convertibility may be matter of time.

RUPEE CONVERTIBILITYConvertibility of a currency implies that a currency can be transferred into another currency without any limitations or any control. A currency is said to be fully convertible, if it can be converted into some other currency at the market price of that currency. 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.At present, Indian rupee is partly convertible on current Account. That is convertibility in the case of transactions relating to exchange of goods and services, money transfer.In 1997, the Tara pore committee on capital Account convertibility was constituted by the Reserve Bank. This committee indicated three preconditions for capital Account convertibility, they are Fiscal consolidation, a mandated inflation target, strengthening of the financial system.During March 2006, Prime Minister said that India is moving towards fuller capital account convertibility. In response to this the Reserve Bank of India set up the Tara pore Committee to work out another roadmap for current account convertibility.Full currency convertibility of the Indian rupee means, can travel abroad and buy dollars over the counters, currency convertibility refers to the absence of any restriction on the holding of foreign currency by residents and of the national currency by foreigners, and on free conversion between currencies. Can incur expenses abroad using the credit card and pay for the dollars (or pounds, or euros) expanded in rupees.This helps to invest in specified foreign shares and mutual funds. And also it attracts many foreign tourists, which can be contributed to the GDP.Therefore, fuller convertibility of Indian rupee helps to attract FDI and also helps Indian's to invest abroad.After the economic liberalization process started in India in 1991, a Liberalised Exchange Rate Mechanism was introduced in 1992.This allowed partial convertibility of Indian rupee, thus introducing dual exchange rate. After that full convertibility on trade account started from 1993.It was followed by Full convertibility on current account from 1994.However after the Mexico crisis in early 1990s or the mammoth East Asia Crisis where there was sudden flow of capital internationally debilitating the economies of the involved nations, India was reluctant to adopt capital account convertibility.

However the Tara pore committee, appointed in 1997, recommended phased implementation of capital account convertibility with certain prerequisites like fiscal deficit to be 3.5% of GDP,CRR to be brought down to 3%, gross NPA of public sector banks to be 5% of the total assets, inflation rate to be around 3.5%.The committee was reappointed almost a decade later and submitted almost the same recommendations with some modifications.

It must be remembered that the movement towards fuller CAC should be a process and not an event. Macroeconomic stability is a must before achieving full CAC. Any adhoc arrangement from the fixed regime maintained for a long period of time might disturb the foreign exchange market and disrupt the economic progress.At present, Indian rupee is partly convertible on current Account. That is convertibility in the case of transactions relating to exchange of goods and services, money transfer.Convertibility of rupees is known as freedom of exchange of rupee with other all international currency. It means that rupee can covert in USA dollars more easily and USA dollars can convert in Indian currency for buying and selling of goods and services. after study everything, I am writing, "it is conspiracy to lower the value of Indian currency that in real sense. In 1996, there were just Rs. 38 for every one dollar but after liberalized convertibility of rupee, one dollar exchange rate has reached up to Rs. 45 in 17th Jan. 2011. When convertibility of Rupee was started, it was claimed that our export will increase because our Indian companies will easy to trade in foreign country due to easy exchange without any govt. restriction. But, it opens doors for importing useless things and moreover it is very sad for India that gold is not make as standard exchange currency. China is smart than India, under his new foreign exchange policy, convert all his foreign exchange in gold. Now, his Chinese yuan is equal to Indian Rs. 6.89

RUPEE AS A CONVERTIBLE CURRENCY:-The recent decision of the government to have full convertibility of the Indian Rupee which will affect everyone in the country but is remotely understandable by a few, is one such important decision, which is designed to please the international financial institutions and the 10 percent of the population of India who are either rich or of upper middle class.It is essential to judge a policy by examining both the costs and benefits of it. The government is talking about the illusory benefits of this convertibility, which will basically remove all obstacle to the free flow of money and as a result goods and services also can move freely. The government, in a fully convertible regime, will not be able to control these flows directly. Indirect controls will be implemented by changing interest rates and taxes but the effectiveness of this control according to the international experiences is uncertain.

9.1) HISTORY OF RUPEE CONVERTIBILITY

Up to 1991, when India faced a major foreign exchange crisis, there had been very rigid controls on both the capital account as well as the current account. Current account convertibility was introduced in India in August 1994. After start of liberalization in1991, India had accepted the IMF rules for currency reforms. In 1997 the government had set up a committee (Tarapore committee) to spell out a road map for the full convertibility of the rupee. Committee suggested three phases of adopting full convertibility of rupee in capital account. First phase in 2006 -2007 Second phase in 2007-2009 Third phase in 2009- 2011

9.2) ADVANTAGES OF RUPEE CONVERTIBILITYThe benefits of free flows of money in a fully convertible regime means foreigners would be able to invest in the Indian stock markets, buy up companies and property including land (unless there are restrictions). Indian people and companies can import anything they would like, buy shares of foreign companies and property in foreign lands and can transfer money as they please without going through the Hawala business. Indians who have not paid their taxes or repaid their loans taken from the Indian banks will be free to transfer their money to foreign countries outside the jurisdiction of the Indian authority.The expected benefits for India would depend on the attractiveness of the country as a safe destination for short-term investments. Long-term investments do not depend on convertibility. China has no convertibility, instead a fixed exchange rate for the last 12 years. Yet, China is the most important destination for long-term foreign investments. Thus, discussions about the full convertibility should be about the desirability of short-term investments and their implications.Short term investments i.e., foreign investments in shares and bonds of the Indian companies and Indian government depend on the demonstration of profit of the Indian companies and the continuous good health of the Indian economy in terms of low budget deficits, low balance of payments deficits, low level of government borrowings and low level of non-performing loan in the Indian banking system. From these points of view India cannot be a very attractive destination as the health of the economy despite of the propaganda of the Indian government is very weak with huge government debt, revenue deficits, Rs.150,000 Crores of uncollected taxes and Rs.120,000 Crores of unpaid loans in the banks, increasing price of petroleum and increasing balance of payments deficits of the country. With 80 percent of people live on less than 2 dollars a day, and 70 percent of the people live on less than 1 dollar a day, profitable market in India is also very small. If the Indian companies working under these constraints cannot demonstrate good and continuous profit, short-term investments will fly out very easily if there is any sign of economic downturn when there is a fully convertible Rupee. The result will be further increase in the balance of payments deficits and fall of the exchange rate of Rupee, which will provoke Indians to take their money out of India.Another advantage of full convertibility of Rupee for the Indian rich is that they can import as they like and buy properties abroad as they were allowed to do so during the days of British Raj. It has certain advantages for the Indian companies who will be able to import both raw materials and machineries or set up foreign establishments at will 9.3) DISADVANTAGES OF RUPEE CONVERTIBILITYFull convertibility also has adverse consequences for the Indias domestic producers of these raw materials and machineries, as they have to compete against foreign suppliers who like Chinese may have deliberate low rate of exchange for their currencies thus making their goods low in price. Foreign suppliers also can be supported by all kinds of subsidies by their government so as to make their prices very low. Agricultural exports from Europe, USA, Thailand, and Australia can ruin Indias own agriculture.There are many such historical examples in India. Within 20 years between 1860 and 1880, Indias domestic manufacturing industries were wiped out by free trade and convertible Rupee during the days of British Raj. Indian farmers during those days could not cultivate their lands, as the imported food products were cheaper than whatever they could produce. Demonstration of wealth by the Nawabs and Maharajas of India in Paris and London during the days of British Raj has not done any good for starving millions of India but was responsible for massive misuse of Indias foreign currency reserve created by the sweat and blood of the Indias poor in those days. Full convertibility of Rupee and free trade may bring back those dark days.The freedom for Indias rich to buy companies and property abroad may lead to massive diversion of funds from investments in the home economy of India to investments abroad. This would amount to export of jobs to foreign countries creating more and more unemployment at home. Japan in recent years suffers from this phenomenon, where increasingly Japanese companies are transferring funds to China for investments, taking advantage of the very low wage rate and low exchange rate of Yuan, thus creating unemployment at home. Although China has massive surplus in the balance of payments, huge reserve of dollars and gigantic flows of foreign investments, a nonconvertible Yuan and controls on transfer of money have kept Chinas exchange rate low enough so that Chinese goods can capture the markets of every important country of the world.The most dangerous consequence of convertibility is that Rupee will be under the control of currency speculators. A fully convertible regime for the Rupee will certainly include participation of Rupee in the international currency market and in the future market of Rupee, the playground for the international speculators. It is very much possible for the speculators to buy massive amount of Rupee to drive up its exchange Rate.

1.Man is a wanting being, i.e. his wants are growing continuously even when some wants are satisfied. Human needs are of varied and diversified nature. They can be arranged in a hierarchy of importance progressing from a lower to a higher order of needs.2.Needs have a definite hierarchy of importance. As soon as needs on a lower level are fulfilled, those on the next level will emerge and demand satisfaction. This suggests that bread (food) is essential and is a primary need of every individual. According to Maslow, "Man lives by bread alone when there is no bread." However, he feels the other needs when his physiological needs are fulfilled. In brief, bread is important but man does not live by bread alone. There are other needs (security / safety, social, esteem and self actualisation which influence behavior of people (employees) to work. This is the basic feature of Maslow's need hierarchy. Attention to all human needs is essential for motivation of employees. Attention to the provision of bread alone is not adequate for motivating employees. Bread can act as motivating factor when there is no bread but when it is available, its use as motivator comes to an end. Here, other motivators (e.g. security of job, social status, etc.) will have to be introduced for motivating employees. Attention to other needs such as security needs, social needs, esteem needs and self actualisation needs is equally important and essential for the motivation of different categories of employees. Maslow, in his theory, has referred to different needs and suggested that attention needs to be given to all such needs as attention to physiological needs alone is not adequate for motivating employees. According to Maslow, "Man does not live by bread alone". This conclusion of Maslow is a practical reality and needs to be given adequate attention while motivating employees.3.A satisfied need does not act as a motivator.4.As one need is satisfied, another replaces it.Maslow's Pyramid of Human Needs is shown in the following diagram.The Maslow's Pyramid of Human Needs is explained below :-1.Physiological Needs : Physiological needs are the basic needs for sustaining human life. These needs include food, shelter, clothing, rest, air, water, sleep and sexual satisfaction. These basic human needs (also called biological needs) lie at the lowest level in the hierarchy of needs as they have priority over all other needs. These needs cannot be postponed for long. Unless and until these basic physiological needs are satisfied to the required extent, other needs do not motivate an employee. A hungry person, for example, is just not in a position to think of anything else except his hunger or food. According to Maslow, 'man lives by bread alone,' when there is no bread. The management attempts to meet such physiological needs through fair wages.2.Security / Safety Needs : These are the needs connected with the psychological fear of loss of job, property, natural calamities or hazards, etc. An employee wants protection from such types of fear. He prefers adequate safety or security in this regard i.e. protection from physical danger, security of job, pension for old age, insurance cover for life, etc. The safety needs come after meeting the physiological needs. Such physiological needs lose their motivational potential when they are satisfied. As a result, safety needs replace them. They begin to manifest themselves and dominate human behavior. Safety needs act as motivational forces only if they are unsatisfied.3.Social Needs : An employee is a human being is rightly treated as a social animal. He desires to stay in group. He feels that he should belong to one or the other group and the member of the group should accept him with love and affection. Every person desires to be affiliated to such groups. This is treated as basic social need of an individual. He also feels that he should be loved by the other members. He needs friends and interaction with his friends and superiors of the group such as fellow employees or superiors. Social needs occupy third position in the hierarchy of needs.4.Esteem Needs : This category of needs include the need to be respected by others, need to be appreciated by others, need to have power and finally prestigious position. Once the previous needs are satisfied, a person feels to be held in esteem both by himself and also by others. Thus, esteem needs are two fold in nature. Self esteem needs include those for self confidence, self-respect, competence, etc. The second groups of esteem needs are those related to one's status, reputation, recognition and appreciation by others. This is a type of personal ego which needs to be satisfied. The Organisation can satisfy this need (ego) by giving recognition to the good work of employees. Esteem needs do not assume the motivational properties unless the previous needs are satisfied.5.Self-actualisation Needs : This is the highest among the needs in the hierarchy of needs advocated by Maslow. Self actualisation is the desire to become what one is capable of becoming. It is a 'growth' need. A worker must work efficiently if he is to be ultimately happy. Here, a person feels that he should accomplish something in his fife. He want to utilise his potentials to the maximum extent and desires to become what one is capable of becoming. A person desires to have challenges and achieves something special in his life or in the area of his specialization. Though every one is capable of self-actualization, many do not reach this stage. This need is fully satisfied rarely.Maslow's theory of motivation (Hierarchy of Needs Theory) is very popular all over the world and provides guidelines to managers / managements for motivating employees. However, Maslow's theory has many limitations.Limitations of Maslow's Hierarchy of Needs Theory are noted below :-Maslow's theory is over simplified and is based on human needs only. There is lack of direct cause and effect relationship between need and behavior.The theory has to refer to other motivating factors like expectations, experience and perception.Needs of all employees are not uniform. Many are satisfied only with physiological needs and security of employment.The pattern of hierarchy of needs as suggested by Maslow may not be applicable uniformly to all categories of employees.Maslow's assumption of 'need hierarchy' does not hold good in the present age as each person has plenty of needs to be satisfied, which may not necessarily follow Maslow's need hierarchy.Maslow's theory is widely accepted but there is little empirical evidence to support it. It is largely tentative and untested. His writings are more philosophical than scientific.squareImportance of Hierarchy of Needs TheoryAlthough Maslow's Hierarchy of Needs Theory has been criticised on above grounds, still it holds many advantages or merits. It helps the managers to understand the behaviour of their employees. It also helps the managers to provide the right financial and non-financial motivation to their employees. This overall helps to increase the efficiency, productivity and profitability of the organisation.Maslow's hierarchy of needsis a theory inpsychologyproposed byAbraham Maslowin his 1943 paper "A Theory of Human Motivation" inPsychological Review.[2]Maslow subsequently extended the idea to include his observations of humans' innate curiosity. His theories parallel many other theories of humandevelopmental psychology, some of which focus on describing the stages of growth in humans. Maslow used the terms "physiological", "safety", "belongingness" and "love", "esteem", "self-actualization" and "self-transcendence" to describe the pattern that human motivations generally move through.Maslow studied what he called exemplary people such asAlbert Einstein,Jane Addams,Eleanor Roosevelt, andFrederick Douglassrather thanmentally illorneuroticpeople, writing that "the study of crippled, stunted, immature, and unhealthy specimens can yield only a cripple psychology and a cripple philosophy."[3]Maslow studied the healthiest 1% of the college student population.[4]Maslow's theory was fully expressed in his 1954 bookMotivation and Personality.[5]The hierarchy remains a very popular framework insociologyresearch, management training[6]andsecondaryandhigherpsychology instruction.Maslow's hierarchy of needs is often portrayed in the shape of a pyramid with the largest, most fundamental levels of needs at the bottom and the need forself-actualizationat the top.[1][7]While the pyramid has become the de facto way to represent the hierarchy, Maslow himself never used a pyramid to describe these levels in any of his writings on the subject.The most fundamental and basic four layers of the pyramid contain what Maslow called "deficiency needs" or "d-needs": esteem, friendship and love, security, and physical needs. If these "deficiency needs" are not met with the exception of the most fundamental (physiological) need there may not be a physical indication, but the individual will feel anxious and tense. Maslow's theory suggests that the most basic level of needs must be met before the individual will strongly desire (or focus motivation upon) the secondary or higher level needs. Maslow also coined the term "metamotivation" to describe the motivation of people who go beyond the scope of the basic needs and strive for constant betterment.[8]The human mind and brain are complex and have parallel processes running at the same time, thus many different motivations from various levels of Maslow's hierarchy can occur at the same time. Maslow spoke clearly about these levels and their satisfaction in terms such as "relative," "general," and "primarily." Instead of stating that the individual focuses on a certain need at any given time, Maslow stated that a certain need "dominates" the human organism.[9]Thus Maslow acknowledged the likelihood that the different levels of motivation could occur at any time in the human mind, but he focused on identifying the basic types of motivation and the order in which they should be met.Physiological needsPhysiological needs are the physical requirements for human survival. If these requirements are not met, the human body cannot function properly and will ultimately fail. Physiological needs are thought to be the most important; they should be met first.Air, water, and food aremetabolicrequirements for survival in all animals, including humans. Clothing and shelter provide necessary protection from theelements. While maintaining an adequate birth rate shapes the intensity of the human sexual instinct,sexual competitionmay also shape said instinct.[2]Safety needsWith their physical needs relatively satisfied, the individual's safety needs take precedence and dominate behavior. In the absence of physical safety due to war, natural disaster,family violence,childhood abuse, etc. people may (re-)experiencepost-traumatic stress disorderortransgenerational trauma. In the absence of economic safety due to economic crisis and lack of work opportunities these safety needs manifest themselves in ways such as a preference forjob security, grievance procedures for protecting the individual from unilateral authority, savings accounts, insurance policies, reasonable disability accommodations, etc. This level is more likely to be found in children because they generally have a greater need to feel safe.Safety and Security needs include:Personal securityFinancial securityHealth and well-beingSafety net against accidents/illness and their adverse impactsLove and belongingAfter physiological and safety needs are fulfilled, the third level of human needs is interpersonal and involves feelings ofbelongingness. This need is especially strong in childhood and can override the need for safety as witnessed in children who cling to abusive parents. Deficiencies within this level of Maslow's hierarchy due tohospitalism,neglect,shunning,ostracism, etc. can impact the individual's ability to form and maintain emotionally significant relationships in general, such as:FriendshipIntimacyFamilyAccording to Maslow, humans need to feel a sense of belonging and acceptance among their social groups, regardless whetherthese groups are large or small. For example, some large social groups may include clubs, co-workers, religious groups, professional organizations, sports teams, and gangs. Some examples of small social connections include family members, intimate partners, mentors, colleagues, and confidants. Humans need to love and be loved both sexually and non-sexually by others.[2]Many people become susceptible to loneliness,social anxiety, andclinical depressionin the absence of this love or belonging element. This need for belonging may overcome the physiological and security needs, depending on the strength of the peer pressure.EsteemAll humans have a need to feel respected; this includes the need to haveself-esteemand self-respect. Esteem presents the typical human desire to be accepted and valued by others. People often engage in a profession or hobby to gain recognition. These activities give the person a sense of contribution or value. Low self-esteem or aninferiority complexmay result from imbalances during this level in the hierarchy. People with low self-esteem often need respect from others; they may feel the need to seek fame or glory. However, fame or glory will not help the person to build their self-esteem until they accept who they are internally. Psychological imbalances such asdepressioncan hinder the person from obtaining a higher level of self-esteem or self-respect.Most people have a need for stable self-respect and self-esteem. Maslow noted two versions of esteem needs: a "lower" version and a "higher" version. The "lower" version of esteem is the need for respect from others. This may include a need for status, recognition, fame, prestige, and attention. The "higher" version manifests itself as the need for self-respect. For example, the person may have a need for strength, competence, mastery,self-confidence, independence, and freedom. This "higher" version takes precedence over the "lower" version because it relies on an inner competence established through experience. Deprivation of these needs may lead to an inferiority complex, weakness, and helplessness.Maslow states that while he originally thought the needs of humans had strict guidelines, the "hierarchies are interrelated rather than sharply separated".[5]This means that esteem and the subsequent levels are not strictly separated; instead, the levels are closely related.Self-actualizationMain article:Self-actualization"What a man can be, he must be."[10]This quotation forms the basis of the perceived need for self-actualization. This level of need refers to what a person's full potential is and the realization of that potential. Maslow describes this level as the desire to accomplish everything that one can, to become the most that one can be.[11]Individuals may perceive or focus on this need very specifically. For example, one individual may have the strong desire to become an ideal parent. In another, the desire may be expressed athletically. For others, it may be expressed in paintings, pictures, or inventions.[12]As previously mentioned, Maslow believed that to understand this level of need, the person must not only achieve the previous needs, but master them.ResearchRecent research appears to validate the existence of universal human needs, although the hierarchy proposed by Maslow is called into question.[13][14]FollowingWorld War II, the unmet needs of homeless and orphaned children presented difficulties that were often addressed with the help ofattachment theory, which was initially based on Maslow and others' developmental psychology work byJohn Bowlby.[15]Originally dealing primarily withmaternal deprivationand concordant losses of essential and primal needs, attachment theory has since been extended to provide explanations of nearly all the human needs in Maslow's hierarchy, from sustenance and mating to group membership and justice.[16]CriticismIn their extensive review of research based on Maslow's theory, Wahba and Bridwell found little evidence for the ranking of needs that Maslow described or for the existence of a definite hierarchy at all.[17]The order in which the hierarchy is arranged (with self-actualization described as the highest need) has been criticized as being ethnocentric byGeert Hofstede.[18]Maslow's hierarchy of needs fails to illustrate and expand upon the difference between the social and intellectual needs of those raised inindividualisticsocieties and those raised incollectivistsocieties. The needs and drives of those in individualistic societies tend to be more self-centered than those in collectivist societies, focusing on improvement of the self, with self-actualization being the apex of self-improvement. In collectivist societies, the needs of acceptance and community will outweigh the needs for freedom and individuality.[19]The term "Self-actualization" may not universally convey Maslow's observations; this motivation refers to focusing on becoming the best person that one can possibly strive for in the service of both the self and others.[9]Maslow's term of self-actualization might not properly portray the full extent of this level; quite often, when a person is at the level of self-actualization, much of what they accomplish in general may benefit others or, "the greater self".The position and value of sex on the pyramid has also been a source of criticism regarding Maslow's hierarchy. Maslow's hierarchy places sex in the physiological needs category along with food and breathing; it lists sex solely from an individualistic perspective. For example, sex is placed with other physiological needs which must be satisfied before a person considers "higher" levels of motivation. Some critics feel this placement of sex neglects the emotional, familial, and evolutionary implications of sex within the community, although others point out that this is true of all of the basic needs.[20][21]