Emergence and Role of Foreign Capital in India

Abstract

Foreign capital has significant role for every national economy, regardless of its level of development. For the developed countries it is necessary to support sustainable development. For the developing countries, it is used to increase accumulation and rate of investments to create conditions for more intensive economic growth. Since the introduction of the reform process in the early 1990s, India has witnessed a significant increase in cross-border capital flows, a trend that represents a clear break from the previous two decades. As regards the composition of capital flows, the thrust of the policy reform in India in the aftermath of the balance of payments crisis was to encourage non-debt-creating flows and discourage short-term debt flows. Equity flows under foreign direct investment (FDI) and foreign portfolio investments constitute the major forms of non-debt-creating capital flows to India. There has been a marked increase in the magnitude of FDI inflows to India since the early 1990s, reflecting the liberal policy regime and growing investor confidence. Domestic factors, such as strong macroeconomic fundamentals, a resilient financial sector, a deep and liquid capital market, the improved financial performance of the corporate sector and attractive valuations also attracted large portfolio flows.