Foreign Capital Inflow

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Effects of Foreign Capital Inflow on the Economy

Recently India’s Home Minister Mr. P. Chidambaram pointed out that surge in foreign capital inflow can be a cause of the rise inflation rate in the economy. This is true! With opening up of the economy, foreign capital has become one of the important factors affecting our economy. The country’s economic policies have changed. We are now an open economy affected by the economic and political happenings of the world. We therefore need to broaden our handling of domestic economic problems like inflation. Inflation is no more only due to supply constraints caused by domestic supply constraint caused by poor monsoon or floods. It is affected by global demand and supply of goods and capital. Today almost all the countries of the world have opened up their respective economy to free capital movement across borders. Foreign capital inflow has both advantages as well as disadvantages. It depends upon the constructive absorption capacity of the economy.

Following liberalization of restrictions on inward investment in 1991-92, there was a sharp increase in capital inflows between 1992-95 and 1996-97.This is similar to the experiences of other emerging economies in Asia and Latin America, all of who typically experienced a rise in inward foreign capital following market- oriented reforms. The magnitude of capital flows into India is much smaller though; the peak level for India is 3.5 per cent of GDP in 1993-94, which is small when compared to other emerging markets. For instance, the peak levels are above 20 per cent for Malaysia, 13 per cent for Thailand, 10 per cent for the Philippines and almost 10 per cent for Singapore between1990-93. Overall net capital flows as percentage of GDP increased from 2.2% in 1990 91 to around 9% in 2007 08. Advantages to the domestic economy

Supplements domestic savings- Less Developed countries lack sufficient savings, required for investment in development projects like building...
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