Chapter 15Foreign Direct Investment in India
Before we can feel much for others, we must in some measure be atease ourselves. If our own misery pinches us very severely, we have noleisure to attend to that of our neighbour; and all savages are too muchoccupied with their own wants and necessities, to give much attention tothose of another person.”
[ Adam Smith in
Theory of Moral Sentiments
Since 1991-92 India has been trying to attract foreign capital to bridge the gap between intended investment and actual saving of the country. To increase the rate of growth of GDP in the range of 7 per cent, the rate of net capital formation should beincreased in the vicinity of 28 to 30%. The savings of the country has been hangingaround 24%. There is a gap and this gap is to be bridged by (a) Portfolio investment byforeign financial institutions (b) lending by foreign banks and other institutions and (c)Foreign Direct Investment. Of these three routes, developing countries prefer the thirdthat is Foreign Direct Investment, as this gives certain advantages to the host country.The advantages of foreign direct investment (FDI) are:i)It increases capital for investment automatically. If we compare this with theacquisition route, we see that foreign capital replaces the domestic capital by atake over or purchase. The released domestic capital may be invested in someother sectors of the economy.ii)FDI in green field ventures brings new technology and modern managementtechnique. In these areas, developing countries are lagging behind.iii)Foreign capital inflow through FDI route creates a permanent stake of foreigncapital in the domestic economy. This may be beneficial for the host country inthe sense that it brings a stabilizing force in the economy.The world investment report 2000 reveals that in the line of countries receivingforeign direct investment, India ranks 17
that means that 16 countries are ahead of Indiaregarding their ability to attract FDI. Countries like Vietnam are also ahead of India.India's share of total FDI inflow into developing countries for the period 1997 to 2000 is1.4% only. There is no point of comparison with China and this is for two reasons.1)China could attract about 25% of total FDI inflow into the developing countries.The next country in the line, that is, Brazil could attract only 10%. The
This Chapter is written jointly with Dr. Biswajit Nag and Dr. Soma Mukhopadhyay, both of them areAssistant Professors of Indian Institute of Foreign Trade, New Delhi.