Private Foreign Investment

Private foreign Investment

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.


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.


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 their portfolios by investing in emerging markets.
International flows of direct investment, which had averaged $142 billion per year
over 1985-90, more than doubled to $350 billion in 1996, with the developing
countries receiving $130... [continues]

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