Foriegn Direct Investment

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Private Foreign Investment in India
August 1999
Authors: Suma Athreye, Manchester School of Management, England Sandeep Kapur, Birkbeck College, University of London, England Address for correspondence Sandeep Kapur Department of Economics Birkbeck College Gresse Street London W1P 2LL UNITED KINGDOM

Telephone: Fax email

44 171 631 6405 44 171 631 6416 skapur@econ.bbk.ac.uk

Abstract
Private foreign capital, whose presence in Indian industry was long regarded with concern and suspicion, is now touted as a panacea for India’s economic problems. This paper compares the relative performance of domestic and foreign-controlled firms in India, and evaluates the contribution of foreign investment over the last five decades. We assess the impact of government policy towards foreign capital, and outline policy implications for the future. Keywords: India, foreign direct investment, MNCs, reform JEL classification: F21, F23, L6

Foreign investment in India

Private Foreign Investment in India*
August 1999

Abstract
Private foreign capital, whose presence in Indian industry was long regarded with concern and suspicion, is now touted as a panacea for India’s economic problems. This paper compares the relative performance of domestic and foreign-controlled firms in India, and evaluates the contribution of foreign investment over the last five decades. We assess the impact of government policy towards foreign capital, and outline policy implications for the future. Keywords: India, foreign direct investment, MNCs, reform JEL classification: F21, F23, L6

*

We thank the Company Finances Division of the Reserve Bank of India for data and guidance; John Cantwell and Ron Smith for comments.

1

Foreign investment in India

1 Introduction
The 1990s have seen a marked increase in private capital flows to India, a trend that represents a clear break from the two decades before that. In the 1970s there was hardly any new foreign investment in India: indeed, some firms left the country. Inflows of private capital remained meagre in the 1980s: they averaged less than $0.2 billion per year from 1985 to 1990. In the 1990s, as part of wideranging liberalisation of the economy, fresh foreign investment was invited in a range of industries. Inflows to India rose steadily through the 1990s, exceeding $6 billion in 1996-97. The fresh inflows were primarily as portfolio capital in the early years (that is, diversified equity holdings not associated with managerial control), but increasingly, they have come as foreign direct investment (equity investment associated with managerial control). Though dampened by global financial crises after 1997, net direct investment flows to India remain positive. Table 1: Recent foreign investment in India, net inflows in $ billion Direct investment Portfolio investment

1990-1 0.10 0.01 0.10

1991-2 0.13 0.00 0.13

1992-3 0.32 0.24 0.56

1993-4 0.59 3.57 4.15

1994-5 1.31 3.82 5.13

1995-6 2.13 2.75 4.88

1996-7 2.70 3.31 6.01

1997-8 3.20 1.83 5.03

1998-9 2.06 -0.06 2.00

Total Sources: see appendix

Table 1 highlights the growth in inflows. To put these figures in perspective, note that the total stock of private foreign equity capital in Indian industry was about $ 2 billion in 1990 (Rupees 40 billion at 1990 exchange rates). Or, comparing the flow to broad external sector aggregates, India’s current account deficit, about $10 billion in the crisis year of 1990-91, was financed primarily through commercial loans and external assistance: private investment flows were paltry. By 1997-98, foreign investment inflows of $5 billion could finance a sizeable chunk of the $6.5 billion current account deficit. India was not unique as a recipient of increased inflows in the 1990s. International flows of private capital to most developing countries rose sharply over this period. The historically low interest rates in the US encouraged global investment funds to diversify...
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