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 stronger
It paves the way for companies to access funds from outside without hindrance. It
makes it far easier for foreign companies to invest in India
2

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
freely convertible into 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 determined exchange 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 that foreign exchange is 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% in banking and 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.
The First Tarapore Committee was set up by the RBI in 1997 to study the
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%, Cash Reserve 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 the First 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 a Second
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 regulations
5. 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 which translate into 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 the system.
Hence, India still needs to work on its fundamentals of providing universal
quality education and 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 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) 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 crossborder movement of those currencies, without the interventions of the law of the country
concerned.
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Following 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:
The average rate of inflation should vary between 3% to 5% during the debtservicing time

Decreasing the gross fiscal deficit to the GDP ratio by 3.5% in 1999-2000
Evolution 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.
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Reasons 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.
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The 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 coexistence 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.

3 TYPES OF CURRENCY CONVERTIBILITY

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.

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 of Partial 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 services
Current 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 facilities
b.

Payments due as interest on loans and as net income from other investments

c.

Payment of moderate amounts of amortization of loans for depreciation of direct investments

d.

Moderate remittances for family living expenses

e.
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/checkup and specialized apprenticeship training.
9.4) PARTIAL CONVERTIBILITY OF RUPEE
Partial 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 to make some
strict rules for stopping outflow of fund on the name of convertibility of rupee or liberalization.

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 CONVERTIBILITY

Convertibility 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 CONVERTIBILITY

The 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 CONVERTIBILITY
Full 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 non
convertible 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 Theory

Although 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 needs is a theory in psychology proposed by Abraham Maslow in his 1943
paper "A Theory of Human Motivation" in Psychological Review.[2] Maslow subsequently extended
the idea to include his observations of humans' innate curiosity. His theories parallel many other
theories of human developmental 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 as Albert Einstein, Jane Addams, Eleanor
Roosevelt, andFrederick Douglass rather than mentally ill or neurotic people, 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 book Motivation and Personality.[5] The hierarchy
remains a very popular framework in sociology research, management
training[6] and secondary and higher psychology 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 for self-actualization at 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 needs
Physiological 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 are metabolic requirements for survival in all animals, including humans.
Clothing and shelter provide necessary protection from the elements. While maintaining an adequate
birth rate shapes the intensity of the human sexual instinct, sexual competition may also shape said
instinct.[2]

Safety needs
With 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-)experience post-traumatic stress
disorder or transgenerational 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 for job 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 security
Financial security
Health and well-being
Safety net against accidents/illness and their adverse impacts

Love and belonging

After physiological and safety needs are fulfilled, the third level of human needs is interpersonal and
involves feelings of belongingness. 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 to hospitalism, neglect, shunning, ostracism, etc. can impact the
individual's ability to form and maintain emotionally significant relationships in general, such as:
Friendship
Intimacy
Family
According to Maslow, humans need to feel a sense of belonging and acceptance among their social
groups, regardless whether these 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 nonsexually by others.[2] Many people become susceptible to loneliness,social anxiety, and clinical
depression in 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.

Esteem
All humans have a need to feel respected; this includes the need to have self-esteem and selfrespect. 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 an inferiority complex may 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 selfesteem until they accept who they are internally. Psychological imbalances such as depression can
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-actualization
Main article: Self-actualization
"What a man can be, he must be."[10] This quotation forms the basis of the perceived need for selfactualization. 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.

Research
Recent research appears to validate the existence of universal human needs, although the hierarchy
proposed by Maslow is called into question.[13][14]

Following World War II, the unmet needs of homeless and orphaned children presented difficulties
that were often addressed with the help of attachment theory, which was initially based on Maslow
and others' developmental psychology work by John Bowlby.[15] Originally dealing primarily
with maternal deprivation and 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]

Criticism
In 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 by Geert Hofstede.[18] Maslow's hierarchy of needs fails to
illustrate and expand upon the difference between the social and intellectual needs of those raised
in individualistic societies and those raised in collectivist societies. 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]