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IN INDIA
Almost every developed country of the world in its initial stages of development had made use of foreign
capital to make up the deficiency of domestic saving. In the seventeenth and eighteenth century, England
borrowed from Holland and in the
nineteenth and twentieth century England gave loans to many countries. United States of America, the richest
country of the world, had borrowed heavily in the nineteenth century and now, in the twentieth century, USA
has become the biggest lender country of the world. Foreign capital has played an important role in economic
development of India. Foreign capital had started flowing in India since the times of East India Company.
However, the policy relating to foreign capital pursued by the British government was favorable to the foreign
capitalists but against the interests of India. After independence, foreign capital was used as a tool for
promoting economic development and to make balance of payments favorable.
Foreign Aid
Foreign Capital may come to a country in the form of foreign aid. Foreign aid refers to concessional loans
and grants received from abroad. The rate of interest on such loans is normally below the market rate of
interest. The period repayment is usually long, sometimes extending over decades. Foreign aid is given by
foreign government and institutions like IMF, World Bank, International Development Association (I.D.A)
etc.
(i) Loans from Foreign Government: In this case, government of one country
loans to government of another country. These loans can be of following types:
(a) Soft Loans: These are long term loans with low rate of interest.
(a) Project loans: These are given for completion of specific projects.
(b) Non-Project Loans: These loans are not meant for any particular project. These loans can be used
for any purpose.
(ii) Loans from International Institutions: International Financial Institutions like World Bank
International Monetary Fund (I.M.F), Asian Development Bank, etc. also provide loans in the form of
foreign capital. These institutions provide loans both to private as well as public sectors. These loans may
be Soft loans, Project loans or Non Project loans.
Commercial Borrowings
These loans are raised from foreign banks at market rate of interest. Rate of interest on commercial
borrowing is higher than on loans as foreign aid. Repayment period of commercial borrowing is shorter
than loan as foreign aid. Commercial borrowings include:
(1) Loans from Foreign Banks: Many a time, Government of India has raised loans from the foreign
banks such as U.S Exim Bank, Japanese Exim Bank, ECGC (Export Credit Guarantee Corporation of U.K)
etc.
(2) Deposits of NRIs: Another important source of commercial borrowing in India is the inflow of
Non-Resident Indian (NRI) deposits. Non-resident deposit have been considered a major component of
countrys foreign inflows during the past decade. This amount is deposited by NRIs in Indian bank
accounts and Indian banks provide interests on these deposits. Their rate of interest is usually equal to the
market rate of interest.
Foreign Investment
Foreign investment refers to the investment by foreign investors in shares, debentures, bonds of
Indian companies. Foreign aid has contributed to the development of our economy, but its availability has
shrunk in recent times. We have reduced our dependence on commercial borrowings because commercial
borrowings are raised at the market rate of interest. It created a problem of debt servicing (interest
payment). Because of this, our government has start encouraging the entry of foreign capital from foreign
private sector. Foreign private sector investment is made by individuals or companies of foreign country in
the private or public sector in India. This type of investment is mainly in the form of equity capital, which
has no fixes interest burden. It can be classified as under:
(1) Foreign Direct Investment (FDI): Foreign direct investment by foreign companies in order to
establish wholly owned companies in other countries and to manage them or to purchase shares of
companies in another country for the purpose of managing such companies. The main characteristics
of foreign direct investment are that native companies are managed by the foreign companies or new
companies are setup in India by foreign companies. In this type of investment, it is the foreign investor, who
takes risk and is solely responsible for profit/loss of such company. It also includes foreign collaborations,
which mean setting up of an enterprise, jointly by the foreign and native entrepreneurs. It may be of following
types:
a non resident,
.
Export Oriented Units (EOUs)
100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals
which are not covered under the automatic route would be considered and approved by FIPB.
Industrial Park
100% FDI is permitted under automatic route for setting up of Industrial Park. Electronic Hardware
Technology Park (EHTP) Units All proposals for FDI / NRI investment in EHTP Units are eligible for
approval under automatic route subject to parameters listed . For proposals not covered under automatic route,
the applicant should seek separate approval of the FIPB, as per the procedure outlined in the policy.
year. The FDI inflow for 2007-08 has been reported as $24 billion and for 2008-09, it is expected to be above
$35 billion.
A critical factor in determining India's continued economic growth and realizing the potential to be an
economic superpower is going t o depend on how the government can create incentives for FDI flow across a
large number of sectors in India. The supply of money into the economy has increased steadily due to FDIs.
(Between April 2008 and January 2009, India received total foreign investments of US $ 15,545 million).The
Foreign Institutional Investors (FIIs) have invested heavily in the stock market, resulting in a continual bull
run for an extended period of time. The BSE indices scaled a new peak of 21, 000 in January 2008. India, post
liberalization, has not only opened its doors to foreign investors but al so made investing easier for them by
implementing the following measures: o Foreign exchange controls have been eased on the account of trade. o
Companies can raise funds from overseas securities markets and now have considerable freedom to invest
abroad for expanding global operations. o Foreign investors can remit earnings from Indian operations. o
Foreign trade is largely free from regulations, and tariff levels have come down sharply in the last two years. o
While most Foreign Investments in India (up to 51 % ) are allowed in most industries, foreign equity up to
100 % is encouraged in export-oriented units, depending on the merit of the proposal. In certain specified
industries reserved for the small scale sector, foreign equity up t24 % is being permitted now. 20
Shradha.Diwan@gmail.com
As the industry progresses, opportunities abound in India, which has the world's largest middle class
population of over 300 million, is attracting foreign investors by assuring them good ret urns. The scope for
foreign investment in India is unlimited. India offers to foreign investors a well balanced package of fiscal
incentives for exports and industrial investments that includes: o Complete tax exemptions. Investment
incentives are offered by both the Central Government and the Government of the State in which the unit is
located. o India has tax treaties with 40 countries. Moreover, the support of the common man regarding FDI is
clearly from the sharp hike in India's gross expenditure in the past few years.
Global flow of foreign direct investment reached at a record level of $ 1,306 billions in the year 2006.
Increase in FDI was largely fuelled by cross boarder mergers and acquisitions (M&As). FDI in 2006 increased
by 38% than the previous year.
Most of the developing and least developed countries worldwide equally participated in the process of direct
investment activities.
FDI inflows to Latin American and Caribbean region increased by 11 percent on an average in
comparison to previous year.
In African region FDI inflows made a record in the year 2006.
Flow of FDI to South, East and South East Asia and Oceania maintained an upward trend.
Both Turkey and oil rich Gulf States continued to attract maximum FDI inflows.
United States Economy, being worlds largest economy also attracted larger FDI inflows from Euro
Zone and Japan.
Higher inflows of FDI to a country largely generates employment in the nation. FDI in manufacturing sector
creates more employment opportunities than to any other sectors.
For the year 2006, countries such as Luxembourg, Hong Kong China, Suriname, Iceland and Singapore
ranked in the top of Inward performance Index Ranking of the UNCTAD.
Over recent years most of the countries over the world have made their business environment investment
friendly for absorbing global opportunities by attracting more investable funds to the country.
(1) Liberal Approach: Present approach towards foreign capital is to welcome its inflow. The entry
of foreign capital has been permitted in consumer goods and capital goods including high priority
industries. Foreign Investment approval for various investment projects is automatic. The share of
foreign equity capital in Indian industries has been allowed to 100%. The approach of the government
towards FDI is liberal and investors friendly.
(2) Various forms of Foreign Capital: Earlier foreign capital was raised mainly
through
foreign aid and commercial borrowings. But now it is raised in various forms, such as:
(i) Foreign collaboration
(ii) Foreign Equity Participation
(iii) Investments by Foreign Institutional Investors, Non resident Indians and other Foreign
Investors
(iv) Raising of funds by Indian Corporate Sectors in Foreign Markets
(3) Tax Concessions to NRIs: To attract foreign capital from Non-Resident Indians, government
in recent years, announced a number of tax concessions, tax holidays for a certain period on profits of
new industrial undertakings, lowering tax rates on short term and long term capital gains for NRIs.
(4) Technological Collaborations: For promoting the inflow of modern technology, new
foreign investment policy granted various concessions to technical collaboration agreements. Under the
new policy. No approval will be needed to make payment in foreign currency to foreign technical
experts or for getting indigenously developed techniques tested abroad.
(5) Organisation of Boards: The new policy provides for the organization of boards for direct
foreign capital investment in selected areas. These boards will negotiate with MNCs for setting up their
enterprises in India. These boards will function under a special programme so that foreign capital is
attracted on a large-scale, foreign technical know-how can be obtained and Indian exports may have
access to world markets.
(6) Foreign Investment in Small Industries: Under new small industrial policy, foreign
entrepreneur can have 24% share capital in small industries without any prior approval.
(7) Joint Ventures: The conditions for establishing joint ventures have been made simpler and liberal
from January 1997. the foreign investors can own even more than 51% share capital in joint ventures.
(2) Increase in Foreign Dependence: Foreign capital and aid increase dependence on
foreign countries. The machines, raw material, technical know-how etc. Which are imposed
from abroad increases the dependence of the receiving country in those countries, from whom
these capital goods have been imported for the subsequent supply of spare parts, accessories,
technicians, etc.
(3) More burden of External Debt: Burden of external debt is always more than the
burden of internal debt. The reason being that the debtor country has to transfer foreign
exchange resources to the creditor country. The debtor country has to manage the foreign
exchange to discharge its debt liability. But many a time, because of shortage of foreign
exchange, it becomes difficult to repay the foreign debt with interest.
(5)Uncertainty : The element of uncertainty is large in respect of foreign capital and aid .
It may be repatriated at any time. Hence, foreign capital can never be a permanent part of an
economy. At the time of crisis when capital is needed the most, its availability becomes
scarce.
(6) Harmful for Domestic Producers: Domestic producers stand to suffer because of
the establishment of industries financed by foreign capital. They are enable to compete with
foreign enterprises. Their profits decline. It has an adverse effect on their development. Many
a time, they have to stop production.
(7) Unbalanced development: In India, foreign capital has been invested in high profit
industries. Consequently, basic and key industries could not develop properly. Industrial
development of the country, therefore is not balanced one.
(9) More Project Aid: Foreign aid is of two kinds: (i)Tied Aid
(ii) Untied Aid.
Tied Aid can be used only for a particular project and for importing goods from a particular
country. It not only restricts the freedom of the country but it has also to buy goods at high
prices. As against it, untied aid is used at the discretion of the borrower country. There is no
restriction imposed on its utilization. Of the total foreign aid received in India. 66% is tied aid
and remaining 34% is untied aid. Consequently, India does not get freedom to use the foreign
aid. Most of the foreign trade is not utilized at its discretion.
(10) Problem of Debt Servicing: Foreign loans give rise to the problem of debt
servicing. It implies repayment of the principal and payment of interest at the expiry of debt
period. The burden of debt servicing on Indian economy has been rising. Increased burden of
debt servicing has an adverse effect on the long-tern balance of payments problems.
(1)Untied Aid: Optimum use of foreign aid requires that it should be untied. India can make
use of the untied aid as desired by it. Thus, foreign capital can be utilized to get maximum
benefits.
(2) Long-Term Loans: Agreement regarding foreign loan should be long-term. As a result
of it, there will be less element of uncertainty and pre-planning of schemes regarding
economic development would become possible. It will help to invest foreign capital in long
term key projects like dams, irrigation projects, ports, airports, etc.
(3) Use for Productive Projects: Foreign capital should be utilized for productive
purposes so that there is rapid growth of the economy. The income generated by the
productive projects can be used for repaying loans. Thus, the foreign capital will become selfliquidating and its burden on the economy will go on diminishing.
(4) More Aid for International Institutions: India should receive more aid from
international institutions like International Development Association, International Monetary
Fund, World Bank etc., as against commercial borrowings. These institutions can provide
untied liberal aid on a large scale. Moreover, it will involve less political pressure on the
country.
(5) Foreign Capital Linked with Exports: India should encourage such foreign capital
investment as in likely to increase exports. If foreign capital is invested in export oriented
industries it will reduce the burden of foreign capital and increase the availability of foreign
exchange in the country.
(6) Reduction in the Burden of the Debt Servicing: Attempts should be made to
bring down the burden of debt servicing. As far as possible , concessional loans should be
encouraged. Debt relief aid should be procured from international organizations. Efforts
should be made to repay old debt.