FOREIGN CAPITAL AND FOREIGN

FOREIGN CAPITAL AND FOREIGN INVESTMENTIN INDIA

Almost every developed country of the world in its initial stages of development had made use of foreign capital to make up the deficiency of domestic saving. In the seventeenth and eighteenth century, England borrowed from Holland and in the

nineteenth and twentieth century England gave loans to many countries. United States of America, the richest country of the world, had borrowed heavily in the nineteenth century and now, in the twentieth century, USA has become the biggest lender country of the world. Foreign capital has played an important role in economic development of India. Foreign capital had started flowing in India since the times of East India Company. However, the policy relating to foreign capital pursued by the British government was favorable to the foreign capitalists but against the interests of India. After independence, foreign capital was used as a tool for promoting economic development and to make balance of payments favorable.

Meaning of Foreign Capital

Foreign Capital refers to the investment of capital by a foreign government, institution, private individual, and international organization in a country. Foreign Capital includes foreign aid, commercial borrowing and foreign investment. Foreign aid includes foreign grants, concessional loans, etc. Foreign Capital is invested in the form of foreign currency, foreign machines and foreign technical know-how. Foreign Capital has many forms, that is foreign collaborations, loan in the form of foreign currency, investment in equity capital, etc. Many foreign institutions and governments give grants. The main difference between foreign grants and loans is that loans are repaid with interest, whereas grants are not repaid.There are many Forms of Foreign Capital Flowing into India such as banking and NRI deposits.The various Forms of Foreign Capital Flowing into India has helped to bring in huge amounts of FDI into the country, which in its turn has given a major boost to the Indian economy.Foreign Direct Investment in India:The government of India made several changes in the economic policy of the country in the early 1990s.This led to the deregulation and liberalization of the Indian economy and also increased the flow of foreign direct investment into the country. The total amount of foreign direct investment in India stood at US$ 42.3 billion in 2001, in 2002 this figure came to US$ 54.1 billion, in 2003 this figure stood at US$ 75.4 billion, and in 2004 this figure increased to US$ 113 billion. This shows that the total amount of foreign direct investment in India has increased at a very rapid pace over the last few years.Various Forms of Foreign Capital Flowing into India:The Forms of Foreign Capital Flowing into India include, NRI deposits, which are made in profitable foreign currency accounts. The total amount of Foreign Capital Flowing into India in the form of NRI deposits came to US$ 2.32 billion in 2000- 2001, in 2001- 2002 this figure stood at US$ 2.75 billion, and in 2002- 2003 this figure increased to US$ 2.98 billion.

Further the various Forms of Foreign Capital Flowing into India are portfolio flow of capital that are made by institutional foreign investors that make investments in India's debt and stock markets. The total amount of Foreign Capital Flowing into India in the form of investments being made by foreign investors in the country's stock markets came to US$ 2.8 billion in 2000- 2001, in 2001- 2002 this figure stood at US$ 2 billion, and in 2002- 2003 this figure came to US$ 979 million.

The Forms of Foreign Capital Flowing into India also include, investments that are being made by the foreign investors in the commercial banks of India. The total amount of Foreign Capital Flowing into India in the form of investments in the commercial banks by foreign investors came to US$ 2.63 billion in 2001- 2002 and the next year, this figure increased to US$ 5.15 billion.Indian government must boost Foreign Direct Investment:The government of India must make polices that will help bringing in huge amounts of foreign direct investment into the country, for this will lead to the growth of the Indian economyClassification of foreign capital

Foreign Capital is classified as under:

(1) Foreign Aid

(2) Commercial Borrowings

(3) Foreign Investment- Participation in Equity Capital/Bonds/Debentures

Foreign Aid

Foreign Capital may come to a country in the form of foreign aid. Foreign aid refers to concessional loans and grants received from abroad. The rate of interest on such loans is normally below the market rate of interest. The period repayment is usually long, sometimes extending over decades. Foreign aid is given by foreign government and institutions like IMF, World Bank, International Development Association (I.D.A) etc. Foreign aid is of following types:(1) Grants: Apart of foreign aid is received in the form of grants. It involves no repayment obligation on the part of recipient nation, neither by way of payment of interest nor return of capital.

(2) Concessional Loans: The rate of interest on such loans is lower than the market rate of interest. The repayment period of these loans is long. These loans are given to the developing countries for development projects and for meeting balance of payment deficit. These loans are:

(i) Loans from Foreign Government: In this case, government of one country loans to government of another country. These loans can be of following types:(a) Soft Loans: These are long term loans with low rate of interest.

(a) Project loans: These are given for completion of specific projects.

(b) Non-Project Loans: These loans are not meant for any particular project. These loans can be used for any purpose.(ii) Loans from International Institutions: International Financial Institutions like World Bank International Monetary Fund (I.M.F), Asian Development Bank, etc. also provide loans in the form of foreign capital. These institutions provide loans both to private as well as public sectors. These loans may be Soft loans, Project loans or Non Project loans.Commercial Borrowings

These loans are raised from foreign banks at market rate of interest. Rate of interest on commercial borrowing is higher than on loans as foreign aid. Repayment period of commercial borrowing is shorter than loan as foreign aid. Commercial borrowings include:

(1) Loans from Foreign Banks: Many a time, Government of India has raised loans from the foreign banks such as U.S Exim Bank, Japanese Exim Bank, ECGC (Export Credit Guarantee Corporation of U.K) etc.

(2) Deposits of NRIs: Another important source of commercial borrowing in India is the inflow of Non-Resident Indian (NRI) deposits. Non-resident deposit have been considered a major component of countrys foreign inflows during the past decade. This amount is deposited by NRIs in Indian bank accounts and Indian banks provide interests on these deposits. Their rate of interest is usually equal to the market rate of interest.

Foreign Investment

Foreign investment refers to the investment by foreign investors in shares, debentures, bonds of Indian companies. Foreign aid has contributed to the development of our economy, but its availability has shrunk in recent times. We have reduced our dependence on commercial borrowings because commercial borrowings are raised at the market rate of interest. It created a problem of debt servicing (interest payment). Because of this, our government has start encouraging the entry of foreign capital from foreign private sector. Foreign private sector investment is made by individuals or companies of foreign country in the private or public sector in India. This type of investment is mainly in the form of equity capital, which has no fixes interest burden. It can be classified as under:

(1) Foreign Direct Investment (FDI): Foreign direct investment by foreign companies in order to establish wholly owned companies in other countries and to manage them or to purchase shares of companies in another country for the purpose of managing such companies. The main characteristics of foreign direct investment are that native companies are managed by the foreign companies or new companies are setup in India by foreign companies. In this type of investment, it is the foreign investor, who takes risk and is solely responsible for profit/loss of such company. It also includes foreign collaborations, which mean setting up of an enterprise, jointly by the foreign and native entrepreneurs. It may be of following types: (i) Collaborations between Indian and Foreign private companies.

(ii) Collaborations between Indian Government and private companies.

(iii) Collaborations between Indian Government and Foreign Government. ROLE OF FOREIGN INVESTMENTSThe role offoreign investmentsin a developing economy is very vital and especially in its industrialization process. Since Independence India pursued a policy of overcaution mixed skepticism. Thus our policies towards inflow of foreign funds did not encourage the entry of foreign capital into the country. TheReserve Bank of Indiathrough its regulatory mechanism guided and controlled the flow of foreign capital in India. Whatever might have been the wisdom in pursuing such policy it was learned through experience in the later decades that foreign capital is an important means to achieve faster economic development of the country.

After a long wait of nearly 45 years pragmatism finally prevailed in the highest portal of decision-making with the announcement of theNew Industrial Policy in 1991. and took a radically different attitude towards foreign capital. The foreign direct investment was allowed under the new regime in almost all sectors of the economy. The economy was opened up to bring it in tune with the global economy. And changes were effected in industrial and trade policies which were substantially liberalized .In the liberalized atmosphere the change in the attitude of the government was inevitable.Foreign investments can be of two types direct as well indirect. The direct foreign investment which is also known asFDIand includes investments from non-Resident Indians and Overseas Corporate Bodies (OCB) . These are parts of the government efforts to supplement the domestic resources for the economic development of the country. Now FDI is permitted in all sectors including service sector with some sectoral caps. Even foreign investments are allowed in the SSI sector. Similarly such investments are allowed for trading activities with a cap. There are other modes of FDI likeGlobal Depository Receipts, American Depository Receipts, Foreign Currency Convertible Bondsetc. Although India is endeavouring to catch up with China in attracting foreign capital but it is still way behind it.

FDI SCHEME- FEMA REGULATIONS

It is the intent and objective of the Government to promote foreign direct investment through a policy framework which is transparent, predictable, simple and clear and reduces regulatory burden. The system of periodic consolidation and updation is introduced as an investor friendly measure.

Investment is usually understood as financial contribution to the capital of an enterprise or purchase of shares in the enterprise. Foreign investment is investment in an enterprise by a Non-Resident irrespective of whether this involves new capital or re-investment of earnings. Foreign investment is of two kinds (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment.

International Monetary Fund (IMF) and Organization for Economic Cooperation and Development(OECD) define FDI similarly as a category of cross border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long term relationship with the direct investment enterprise to ensure the significant degree of influence by the direct investor in the management of the direct investment enterprise. Direct investment allows the direct investor to gain access to the direct investment enterprise which it might otherwise be unable to do. The objectives of direct investment are different from those of portfolio investment whereby investors do not generally expect to influence the management of the enterprise. In the Indian context, FDI is defined in Para 2.1.12 of this Circular.

It is the policy of the Government of India to attract and promote productive FDI in activities which significantly contribute to industrialization and socio-economic development. FDI supplements domestic capital and technology.

FDI includes investment by:

a non resident,

a non resident incorporated entity (foreign company),

a non resident Indian,

Person of Indian orgin,

FDI includes investment through

Issue of preference shares.

American Deposit Receipts/ Global Deposit Receipts.

Foreign Currency Convertible Bonds.

Foreign investment policies

Central Level PoliciesThe central level policies governing various strategic factors affecting business- investment, land acquisition, electricity provide a conducing environment for business environment. The policies have been aligned over the years with an objective to thrust India on the path of economic growth by attracting foreign and indigenous investment and assisting such investments through a positive business environment inclusive convenience in investment norms, tax reforms, power reforms, port development etc. Some of the key policies have been discussed below:Foreign Direct Investment Policy - Salient FeaturesFDI up to 100% is allowed under the automatic route in all activities / sectors except the following which will require approval of the Government:. Activities / items that require an Industrial License;. Proposals in which the foreign collaborator has a previous / existing venture / tie up in India in the same or allied field. All proposals relating to acquisition of shares in an existing Indian company by a foreign / NRI investor.. All proposals falling outside notified sectoral policy / caps or under sectors in which FDI is not permitted.The policy permits FDI up to 100 % from foreign / NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors / activities under automatic route does not require any prior approval either by the Government or the RBI.

FDI in areas of special economic activitySpecial Economic Zones

100% FDI is permitted under automatic route for setting up of Special Economic Zone. Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB.Export Oriented Units (EOUs)100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals which are not covered under the automatic route would be considered and approved by FIPB.

Industrial Park100% FDI is permitted under automatic route for setting up of Industrial Park. Electronic Hardware Technology Park (EHTP) Units All proposals for FDI / NRI investment in EHTP Units are eligible for approval under automatic route subject to parameters listed . For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB, as per the procedure outlined in the policy.

FOREIGN INVESTMENT IN INDIA POST LIBERALIZATIONBy the beginning of 1990s, the Indian Economy was under great crisis and faced its stiffest challenge. India faced a serious balance of payment problem and foreign exchange reserves were at record low. That is when the government decided to alter the course of the Indian economy. The introduction of reforms in 1991 resulted in sweeping changes in the Indian Economy. The reforms process consisted of three processes, liberalization, privatization and globalization (LPG model). Under liberalization markets were deregulated, under privatization private participation was encouraged and many a public sector undertaking (PS U) were privatized and under globalization restrictions on foreign investments were removed. The Indian economy moved away from its isolation, to be integrated with the global economy and to competitively utilize its advantages to make rapid strides in terms of growth. In India today 60% of the population is dependent directly and indirectly on agriculture and agriculture contributes 17% of GDP. The Industrial sector has witnessed massive restructuring by the way of mergers and acquisitions, process reengineering, foreign joint ventures, technological up gradation. Certain sectors like cement, steel, pharmaceuticals, and automobiles have been witnessing unprecedented growth. The service sector has been one of the major beneficiaries of the economic boom. The outsourcing industry comprising of IT and ITES became the new poster boy of the Indian economy. The huge pool of engineering talent was absorbed by the IT industry, while graduates could carve out a career in the ITE'S industry. The purchasing power of the booming middle class was enhanced, who went on a consumption spree, which in turn allowed the retail sector to flourish. The booming economy also created a wave of real estate boom across the country. India is the fourth-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to some positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle -class population stands at 50 million and represents a growing consumer market. S

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In Marc h 2005, the government amended the rules to allow 100 per cent FDI in t he construction business. This automatic route has been permitted in towns hips, housing, built -up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city - and regional-level infrastructure. A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows into India reached a record $19.5 billion in fiscal year 2006-07 (April- March), according to the government's Secretariat for Industrial Assistance. This was more than double the total of US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24 billion and for 2008-09, it is expected to be above $35 billion.

A critical factor in determining India's continued economic growth and realizing the potential to be an economic superpower is going t o depend on how the government can create incentives for FDI flow across a large number of sectors in India. The supply of money into the economy has increased steadily due to FDIs. (Between April 2008 and January 2009, India received total foreign investments of US $ 15,545 million).The Foreign Institutional Investors (FIIs) have invested heavily in the stock market, resulting in a continual bull run for an extended period of time. The BSE indices scaled a new peak of 21, 000 in January 2008. India, post liberalization, has not only opened its doors to foreign investors but al so made investing easier for them by implementing the following measures: o Foreign exchange controls have been eased on the account of trade. o Companies can raise funds from overseas securities markets and now have considerable freedom to invest abroad for expanding global operations. o Foreign investors can remit earnings from Indian operations. o Foreign trade is largely free from regulations, and tariff levels have come down sharply in the last two years. o While most Foreign Investments in India (up to 51 % ) are allowed in most industries, foreign equity up to 100 % is encouraged in export-oriented units, depending on the merit of the proposal. In certain specified industries reserved for the small scale sector, foreign equity up t24 % is being permitted now. 20 Shradha.Diwan@gmail.com

As the industry progresses, opportunities abound in India, which has the world's largest middle class population of over 300 million, is attracting foreign investors by assuring them good ret urns. The scope for foreign investment in India is unlimited. India offers to foreign investors a well balanced package of fiscal incentives for exports and industrial investments that includes: o Complete tax exemptions. Investment incentives are offered by both the Central Government and the Government of the State in which the unit is located. o India has tax treaties with 40 countries. Moreover, the support of the common man regarding FDI is clearly from the sharp hike in India's gross expenditure in the past few years.

Growing Importance of FDI

During 1986-89 and again in 1995, outflows of FDI grew much more rapidly than world trade. Over the period 1973-95, the estimated value of annual FDI outflows multiplied twelve times (from $25billion to $315billion), while the value of merchandise exports multiplied eight and a half times (from $575billion to $4,900billion).

Sales of foreign affiliates of multinational corporations (MNCs) are estimated to exceed the value of world trade in goods and services (the latter was $6,100billion in 1995).

Intra-firm trade among MNCs is estimated to account for about one-third of world trade, and MNC exports to all other firms for another third, with the remaining one-third accounted for by trade among national (non-MNC) firms.

Benefits of Foreign Direct Investment

One of the advantages of foreign direct investmentis that it helps in the economic development of the particular country where the investment is being made.This is especially applicable for developing economies. During the 1990s, foreign direct investment was one of the major external sources of financing for most countries that were growing economically. It has also been noted that foreign direct investment has helped several countries when they faced economic hardship.It was observed during the 1997 Asian financial crisis that the amount of foreign direct investment made in these countries was held steady while other forms of cash inflows suffered major setbacks. Similar observations have also been made in Latin America in the 1980s and in Mexico in 1994-95.

For host countries,inward FDI has the potential for job creation and employment, which is often followed by higher wages.

Resource transfer, in terms of capital and technical knowledge, is also a key motivator that encourages inward FDI.In recent years,FDI has been used more as a market entry strategy forinvestors, rather than an investment strategy.Despite the decline in trade barriers, FDI growth has increased at a higher rate than the level of world trade as businesses attempt to circumvent protectionist measures through direct investments. With globalization, the horizons and limits have been extended and companies now see the world economy as their market.

Additionally for investors, FDI provides the benefits of reduced cost through the realization of scale economies, and coordination advantages, especially for integrated supply chains. The preference for a direct investment approach rather than licensing and franchising can also been viewed in terms of strategic control, where management rights allows for technological know-how and intellectual property to be kept in-house

Trends in Global Foreign Direct Investment

Flow of Foreign Direct Investment has grown faster over recent past. Higher flow of Foreign Direct Investment over the world always reflect a better economic environment in the presence of economic reforms and investment-oriented policies.

Global flow of foreign direct investment reached at a record level of $ 1,306 billions in the year 2006. Increase in FDI was largely fuelled by cross boarder mergers and acquisitions (M&As). FDI in 2006 increased by 38% than the previous year.

Most of the developing and least developed countries worldwide equally participated in the process of direct investment activities.

FDI inflows to Latin American and Caribbean region increased by 11 percent on an average in comparison to previous year.

In African region FDI inflows made a record in the year 2006.

Flow of FDI to South, East and South East Asia and Oceania maintained an upward trend.

Both Turkey and oil rich Gulf States continued to attract maximum FDI inflows.

United States Economy, being worlds largest economy also attracted larger FDI inflows from Euro Zone and Japan.

Higher inflows of FDI to a country largely generates employment in the nation. FDI in manufacturing sector creates more employment opportunities than to any other sectors.For the year 2006, countries such as Luxembourg, Hong Kong China, Suriname, Iceland and Singapore ranked in the top of Inward performance Index Ranking of the UNCTAD.Over recent years most of the countries over the world have made their business environment investment friendly for absorbing global opportunities by attracting more investable funds to the country.(2) Portfolio Investment: Under this type of investment, foreign companies/ foreign institutional investors (FII) buy shares/ debentures of native companies, however management and control remain vested with the native companies themselves. In the case of investment in debentures, a fixed rate of interest is guaranteed, while in the case of investment in shares, no fixed dividend is guaranteed. Another type of portfolio investment is raising foreign capital by Indian companies from the foreign capital markets by issuing Global Depository Receipts (GDRs), American Depository Receipts (ADRs) and Foreign Currency Convertible Bonds (FCCBs).

Main difference between foreign direct investment and portfolio investment is that in the case of FDI, foreign investor also manages the enterprise, in which it makes investment. While in the case of portfolio investment it simply makes investment but doesnot manage the enterprise.

Need/Objective of Foreign Capital/ Foreign Investment in India

Foreign investment is not considered only as a stock of capital but as something that provides modern technology, managerial expertise, employment opportunities and a new market for products produced in India. Moreover it is essential as we have a gap between our savings and investment requirements. The gap can be filled by foreign direct investment.

Foreign investment is needed due to following reasons for overall economic development of India:

(1) To increase the level of investment by supplementing the domestic investment.

(2) To develop basic industries in India.

(3) To develop infrastructure.

(4) To remove the shortage of foreign exchange, because of deficit balance of payment.

(5) To improve managerial and entrepreneur ability

(6) To exploit natural resources.

(7) To set-up risky and capital intensive projects.

(8) To improve technology.

(9) To increase employment opportunities.

Foreign Capital Policy 1991/ New Foreign Investment PolicyForeign Investment Policy of 1991, was very liberal and it lifted the ceilings on inflow of foreign investment. Earlier, foreign equity participation was restricted up to 40%, but now 100% equity participation is allowed. Earlier all foreign investment and technological agreements needed prior permissions but now the new policy has allowed the foreign capital with automatic approval in many industries. Moreover huge incentives and concessions are granted for the flow of foreign capital in the country. Followings are the main features of new foreign investment policy.

(1) Liberal Approach: Present approach towards foreign capital is to welcome its inflow. The entry of foreign capital has been permitted in consumer goods and capital goods including high priority industries. Foreign Investment approval for various investment projects is automatic. The share of foreign equity capital in Indian industries has been allowed to 100%. The approach of the government towards FDI is liberal and investors friendly.(2) Various forms of Foreign Capital: Earlier foreign capital was raised mainly through foreign aid and commercial borrowings. But now it is raised in various forms, such as:

(i) Foreign collaboration

(ii) Foreign Equity Participation

(iii) Investments by Foreign Institutional Investors, Non resident Indians and other Foreign Investors (iv) Raising of funds by Indian Corporate Sectors in Foreign Markets

(3) Tax Concessions to NRIs: To attract foreign capital from Non-Resident Indians, government in recent years, announced a number of tax concessions, tax holidays for a certain period on profits of new industrial undertakings, lowering tax rates on short term and long term capital gains for NRIs.

(4) Technological Collaborations: For promoting the inflow of modern technology, new foreign investment policy granted various concessions to technical collaboration agreements. Under the new policy. No approval will be needed to make payment in foreign currency to foreign technical experts or for getting indigenously developed techniques tested abroad.(5) Organisation of Boards: The new policy provides for the organization of boards for direct foreign capital investment in selected areas. These boards will negotiate with MNCs for setting up their enterprises in India. These boards will function under a special programme so that foreign capital is attracted on a large-scale, foreign technical know-how can be obtained and Indian exports may have access to world markets.(6) Foreign Investment in Small Industries: Under new small industrial policy, foreign entrepreneur can have 24% share capital in small industries without any prior approval.(7) Joint Ventures: The conditions for establishing joint ventures have been made simpler and liberal from January 1997. the foreign investors can own even more than 51% share capital in joint ventures.(8) Wholly owned Foreign Enterprises: According to new Foreign Capital Policy, the MNCs have been given freedom to establish their wholly owned subsidiaries in India.

(9) Foreign Capital for Infrastructural Development: The government is providing many concessions and facilities to invite foreign investment for the development of infrastructure like roads, power, telecommunications, ports etc. they will be allowed to transfer their earnings in foreign currency. The maximum limit of foreign participation in these joint ventures has been fixed. It is 100% for power, oil exploration, roads, ports, airports, and 74% for banking and telecommunication.(10)Foreign Investment Implementation Authority (FIIA): This authority has been established in August 1999 within the Ministry of Industry. It will ensure the approval for foreign investments are quickly translated into actual inflows. It has also so see that the foreign investment actually leads to the establishment of projects.Other features of the New Foreign Investment Policy are: High Technology and High Priority Industries

Export Promotion

Disinvestment of equity by Foreign Investors

Foreign Institutional Investors

Investment Commission

Fair treatment to Foreign Investments

Benefits of Repatriation

Issue of Global Depository Receipts (GDRs), American Depository Receipts (ADRs) and Foreign Currency Convertible Bonds (FCCBs) by the Indian Companies.

Clearance for Foreign InvestmentIn short the new foreign investment policy is more liberal and encouraging for foreign investors. It aims at encouraging more and more foreign investment in India. Indias share in global foreign direct investment in the year 2004 was just 0.82%. in order to increase it, the procedure for making foreign investment should be simplified and efforts should be made to win the confidence of foreign investors. Shortcoming or limitation of foreign capital

The main disadvantages of foreign capital/foreign investment are as follow:

(1)Hindrance in Adopting Independent Economic Policy: A country like India that receives foreign aid has got to accept the conditions of the donor countries and institutions. The recipient countrys monetary, fiscal, industrial and commercial policies must adhere to the conditions imposed by the donor country. Consequently, it becomes difficult for India to adopt an independent economic policy. (2) Increase in Foreign Dependence: Foreign capital and aid increase dependence on foreign countries. The machines, raw material, technical know-how etc. Which are imposed from abroad increases the dependence of the receiving country in those countries, from whom these capital goods have been imported for the subsequent supply of spare parts, accessories, technicians, etc.

(3) More burden of External Debt: Burden of external debt is always more than the burden of internal debt. The reason being that the debtor country has to transfer foreign exchange resources to the creditor country. The debtor country has to manage the foreign exchange to discharge its debt liability. But many a time, because of shortage of foreign exchange, it becomes difficult to repay the foreign debt with interest.

(4) Insufficient Development of Internal Financial Resources: Foreign capital has an adverse effect on the development of internal financial resources. If foreign capital or loans are easily available, then efforts are not made to increase the savings within the country. In the initial years of planning, the rate of internal savings was very low. It was because of easy access to foreign aid.

(5)Uncertainty : The element of uncertainty is large in respect of foreign capital and aid . It may be repatriated at any time. Hence, foreign capital can never be a permanent part of an economy. At the time of crisis when capital is needed the most, its availability becomes scarce.

(6) Harmful for Domestic Producers: Domestic producers stand to suffer because of the establishment of industries financed by foreign capital. They are enable to compete with foreign enterprises. Their profits decline. It has an adverse effect on their development. Many a time, they have to stop production.

(7) Unbalanced development: In India, foreign capital has been invested in high profit industries. Consequently, basic and key industries could not develop properly. Industrial development of the country, therefore is not balanced one.(8) Hindrance in the Development of Indian Technology: Foreign technology accompanies foreign capital. It has an adverse effect on the development of Indian technology and research. Those Indian firms which are operating in collaboration with foreign firms have not only to depend upon them for technical know-how bur for future technological improvement and repairs also. As a result development of domestic technology is hindered.

(9) More Project Aid: Foreign aid is of two kinds: (i)Tied Aid

(ii) Untied Aid.

Tied Aid can be used only for a particular project and for importing goods from a particular country. It not only restricts the freedom of the country but it has also to buy goods at high prices. As against it, untied aid is used at the discretion of the borrower country. There is no restriction imposed on its utilization. Of the total foreign aid received in India. 66% is tied aid and remaining 34% is untied aid. Consequently, India does not get freedom to use the foreign aid. Most of the foreign trade is not utilized at its discretion.

(10) Problem of Debt Servicing: Foreign loans give rise to the problem of debt servicing. It implies repayment of the principal and payment of interest at the expiry of debt period. The burden of debt servicing on Indian economy has been rising. Increased burden of debt servicing has an adverse effect on the long-tern balance of payments problems.Suggestion to overcome limitation or shortcoming of foreign capitalFor optimum utilization of foreign capital following suggestions are given:

(1)Untied Aid: Optimum use of foreign aid requires that it should be untied. India can make use of the untied aid as desired by it. Thus, foreign capital can be utilized to get maximum benefits.

(2) Long-Term Loans: Agreement regarding foreign loan should be long-term. As a result of it, there will be less element of uncertainty and pre-planning of schemes regarding economic development would become possible. It will help to invest foreign capital in long term key projects like dams, irrigation projects, ports, airports, etc.

(3) Use for Productive Projects: Foreign capital should be utilized for productive purposes so that there is rapid growth of the economy. The income generated by the productive projects can be used for repaying loans. Thus, the foreign capital will become self-liquidating and its burden on the economy will go on diminishing.(4) More Aid for International Institutions: India should receive more aid from international institutions like International Development Association, International Monetary Fund, World Bank etc., as against commercial borrowings. These institutions can provide untied liberal aid on a large scale. Moreover, it will involve less political pressure on the country.

(5) Foreign Capital Linked with Exports: India should encourage such foreign capital investment as in likely to increase exports. If foreign capital is invested in export oriented industries it will reduce the burden of foreign capital and increase the availability of foreign exchange in the country.

(6) Reduction in the Burden of the Debt Servicing: Attempts should be made to bring down the burden of debt servicing. As far as possible , concessional loans should be encouraged. Debt relief aid should be procured from international organizations. Efforts should be made to repay old debt.

(7) More preference to Equity Capital Investment: Foreign capital should be invited more in the form of equity than loans. Equity capital undertakes the risk of enterprise. There is no fixed interest burden in equity investment. So private foreign equity investment is better than foreign debts.

In short, we can conclude with words of Dr. Malcom Adisehiah, The economy needs more investment both domestic and foreign. While domestic investment is responding ti these needs, foreign investment is also beginning to increase. Every effort should be made to increase foreign investment, while taking necessary safeguards against their ill effects and misuse as has been done by the East Asian economies including China which are attracting large amounts of foreign investment but under conditions in which governments supervision and countrys safeguards are ensured.