The inflow of foreign capital into India has not been much and is insignificant as compared to many other developing countries. An important reason of this has been that the past policy towards foreign investment was relatively restrictive. Moreover, foreign investors were wary of tedious procedures and controls.
India’s Policy towards foreign Investment
Till July 1991, foreign equity ownership was generally permitted up to 40 per cent. However, in cases involving transfer of sophisticated technology or where the units were highly export-oriented a higher percentage was allowed. Technology inflows rather than capital inflows was the dominant consideration. Emphasis was placed on absorption of imported technology by India Exports were also given prime considerations. Thus foreign investment was permitted on a selective basis.
As a part of the liberalization process of the Indian economy initiated in July 1991, the Government of India has enunciated the new Industrial policy which has several provisions which may lead to greater inflow of foreign direct investment (FDI) in India. The important provisions are:
1. Foreign equity participation in high priority industries is 51 per cent. They cover 34 broad areas including transportation, food processing, metallurgy, fertilizers, chemicals and industrial equipment. FDI in these sectors will be freely permitted.
2. FDI is now permitted in trading companies which are primarily engaged in export activity, and hotels and other tourism related industries
3. FDI in areas outside those mentioned in (1) and (2) above will also be allowed on a case by case basis.
4. Companies with 51 per cent foreign equity participation would be granted automatic relaxation from several restrictive provisions of Foreign Exchange Management Act (FEMA).
5. A foreign Investment Promotion board has been set up to promote flow of FDI in India
6. Import of capital goods will be freely allowed if payment is covered through foreign equity.
7. Companies with foreign equity up to 51 per cent will be encouraged to act as Export Trading Houses and will be treated on par with domestic trading houses.
8. Foreign equity proposals need not necessarily be accompanied by foreign technology agreements.
9. Automatic permission for foreign technology agreements in high priority sectors will be given for a lump sum payment of Rs 1 crore, 5 per cent royalty for domestic sales and 8 per cent for exports subject to a total payment of 8 per cent of sales over a 10 year period from the date of agreement or 7 years from the commencement of production.
10. The condition of dividend balancing on all foreign investment approvals on 22 consumer items has been scrapped with effect from June 2000.
Foreign Investment in India after the policy:
FDI approvals have as a result increased substantially. While the foreign investment projects approved in 1971-80 were 399 involving an investment of Rs 60 crores and in 1981-90 were 1,839 involving an investment of Rs 1,274 crores, the projects approved between January 1991 and 1997 involved an investment of Rs 1,59,578 crores. The actual flow of direct foreign investment also increased from Rs 351 crores in 1991 to Rs 12,036 crores in 1997. The total inflows between 1991to 1997 amounted to Rs 32,642 crores. The following table gives a idea of FDI flow into India:
Year $ million
1989-94(annual average) 394
It is pertinent to note in this context that India signed on March 13, 1992 the convention of the Multilateral Investment Guarantee Agency (MIGA), a World Bank affiliate which provides insurance to foreign investors against political risks. This will facilitate FDI flow to India as foreign investors now can take insurance cover for nationalisation and related risks.