75 Years of India’s Foreign Exchange Controls: A Story of Slow-Burn Liberalization

Bhargavi Zaveri Shah

The ability to exchange money for goods and services across borders underpins free trade. The convertibility of the Indian rupee into foreign currency and vice versa is integral to this freedom. Today, Indians can, for the most part, seamlessly order consumer goods from vendors abroad using their local bank-issued credit cards. Indians take pride when the indigenously developed Unified Payments Interface (UPI) is enabled for cross-border digital payments. The ability to access cheap capital encourages entrepreneurial ventures and innovation and allows businesses to scale faster.

Prior to 1991 and for many years thereafter, foreign exchange transactions were severely restricted. Indians could travel abroad once every three years and draw up to USD 100 by filing an infamous “P form” with the Reserve Bank of India (RBI). Sometime in the mid-1970s, Indians were “allowed” permissionless foreign travel every other year by drawing up to USD 500 per foreign trip. India Today then aptly summarized the situation thus: “[A]n Indian travelling abroad was necessarily one (or more) of the following: impossibly rich, a scholarship student, a smuggler, a politician, the ubiquitous civil servant, or arteriosclerotic” (Merchant [1978] 2015). Indeed, even the rich and the powerful required the RBI’s approval for drawing foreign exchange, as shown by a letter from Indira Gandhi to the RBI seeking approval to remit Rs 8,000 toward the fees of her son Rajiv in Cambridge (see figure 1). Business ventures with more than 40 percent foreign equity participation required the government’s approval, and those that did not involve technology transfers to the Indian partners were seriously discouraged. Collaboration with multinational companies such as Coca Cola and IBM was conditioned by export obligations (Mukherji 2000).