A long ago, India’ s imports were more than the exports and this shows India has had an unfriendly balance of payment environment in international trade. Because of which there was a deficiency in foreign exchange in India. In the year 1973, when the Indian economy was suffering from low forex (foreign exchange reserves, to rebuild the reserves the government of India took an incredible initiative to introduce FERA (Foreign Exchange Regulatory Act). The objective of the FERA was, all the foreign reserves earned by an Indian resident (either living in India or abroad) had to surrender to the Reserve Bank of India (RBI).
What is FERA and Why did it fail?
The FERA act came into existence intending to regulate inflows and outflows of foreign currency, securities purchased, and foreign payments. But the research says FERA was creating a lot of problems in the development of India so the government decided to replace FEMA in the place of FERA to ensure that the optimum utilization of foreign currency for the development of our Indian economy.
In the upcoming days FEMA replaced FERA.
What is FEMA?
Foreign Exchange Management Act, formulated by the government of India in the year 1999. FEMA was meant to close all the loopholes and the drawbacks of FERA. The primary objective of this act was to facilitate all the external trades of India and also all the payments. And to promote the development of foreign exchanges.
Features of FEMA;
- It contains progressive liberalization of transactions relating to capital accounts.
- It contains convertibility of current accounts
- It is transparent in its applications of reserve bank of India
- It classified into two categories
- Capital account
- Current account
- It provides power to Reserve bank of India
- It gives full freedom to a person of India
Objectives of FEMA;
- To facilitate external trade and payments
- To remove imbalance of payments
- To make a developed foreign exchange market
- To amend the law relating to foreign exchange
- To utilize foreign exchange resource of the country effectively
- To improve foreign exchange reserves
Applicability of FEMA;
- Applicable to all citizens of India
- Any office situated outside India but controlled by a resident of India
- Exports of any goods or services from India to outside India
- Imports of any goods or services from India to outside India
- Foreign exchange and security
- Banking and financial institutions
Provisions of FEMA;
- Free transactions on the current account
- Dealing in foreign exchange
- The holding of foreign exchange
- Capital account transaction
- Exports of goods and services
- The realization of foreign exchange
- Miscellaneous provisions