21-07-2012, 05:02 PM
India’s Foreign Investment Policy
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Introduction
India’s conscious shift in the early 1990s from an inward-looking
development strategy to a globalized market-based approach
resulted in significant changes in its foreign investment policy. Till the
1990s, the policy was heavily restrictive with majority foreign equity
permitted only in a handful export-oriented, high technology
industries. Outward-oriented reforms radically changed such
perceptions with foreign investment policy becoming progressively
liberal following steady withdrawal of external capital controls and
simplification of procedures.
Enabling policies have resulted in aggregate foreign
investment into India increasing from US$103 million in 1990-91 to
US$61.8 billion in 2007-2008.1 India is variously identified as one of
the most attractive long-term investment locations.2 It can attract
much larger foreign investments given its distinct virtues of large
domestic market, rising disposable incomes, developed financial
architecture and skilled human resources. But transforming the
potential to actual will depend significantly upon further liberalization
of its foreign investment policy.
This paper outlines salient aspects of India’s foreign
investment policy and traces the evolution of the same. It follows up
with a critical evaluation of the policy from a political economy
perspective. Structurally the paper is divided into three sections with
the first and second dealing with features of the investment policy and
its evolution and the third attempting to outline the unfinished policy
agenda and the constraints on further liberalization from a political
economy perspective.
Operational Features
Foreign investment comprises foreign direct investment (FDI) and
foreign portfolio investment (FPI). The two categories are
conceptually distinct in several respects. FDI represents a long-term
vision and strategic commitment of the investors to the recipient
economy. In contrast, FPI is intrinsically short-term aiming to
maximize risk-return payoffs from capital markets. While both FDI and
FPI are reflected in capital structures of resident enterprises as equity
held by non-resident entities, FDI is distinguished by the investor’s
desire to hold a controlling stake in the enterprise.3 In this respect,
foreign investment policies of host economies usually refer to FDI
policies with operational procedures for portfolio investment being
functionally inclusive aspects of such policies.
Gradual Evolution
India’s approach to foreign investment during the 1950s and 1960s
was cautiously pragmatic. It was ensured that ownership and
enterprise control remained primarily with resident investors. Within
such limitations, foreign investment was sought to be utilized in a
manner beneficial for the economy.