Y

Y

  Y


Foreign Capital
Kalika Bansal
Amity Global Business School, Ahmedabad.

0
Y
 Y

  Y


áeed for Foreign Capital

ð Sustaining a high level of investment
ð The technological gap
ð Exploitation of natural resources
ð Undertaking the initial risk
ð Development of basic economic
infrastructure
ð The foreign exchange gap

ë
Y
 Y

  Y


Components
ð Two main forms

 Êrivate foreign investment

 Direct
 Êortfolio

 Foreign aid

Y
 Y

  Y


Foreign Aid
ð ÷ncludes ´all official grants and concessional
loans, which are broadly aimed at
transferring resources from developed to
less developed nations on developmental or
income distributional grounds.
ð Lower r
ð Longer maturity period
ð Foreign Governments, ÷ F, World Bank etc.
G
Y
 Y

  Y


÷ndia· policy towards Foreign Capital

ð áo discrimination between foreign and

domestic capital

ð Full opportunities to earn profits

Ú
Y
 Y

  Y


ueasons for sharp increase in FD÷

ð Among the developing countries, ÷ndia has
now emerged as the second most
preferred destination for FD÷
ð ÷ndia·s share (2.3% in 05 to 4.5% in 06)
ð Expansion in domestic activity
ð Êositive investment climate
ð Êrogressive liberalisation of the FD÷ policy
ð Simplification of procedures
ð Growth in financial services, information
technology etc. Ñ
Y
 Y

  Y


Sectoral Composition
ð Largest recipient- Electronic equipment and
computer software (17.54% = one ² sixth)
ð Followed by services sector (12.69%)
ð Telecommunication (10.39%)
ð Transportation (9.31%)
ð Êower and oil refinery (7.45%)
ð Chemicals (5.79%)
ð Food processing industry (3.12%)
ð Drugs and pharmaceuticals (2.19%)
ð etallurgical industries (2.14%) -
Y
 Y

  Y


6


6
^


6
^
 market size (income levels and population)
 extent of urbanization
 quality of infrastructure
 policy factors such as
 tax rates,
 investment incentives,
 performance requirements.

Î
Y
 Y

  Y




6
  
 
ð Generation of Output
ð Employment Generation
ð Balanced uegional Development
ð Export Expansion
ð Technological spillovers
ð Augmenting Capital Stock

r
Y
 Y

  Y


ð FD÷ - Growth relationship is a two way

relationship
 Some times FD÷ projects actually crowd out
domestic investment with their well-known
brand names and other resources.
 ÷ndian evidence suggests that regulations have
prompted foreign enterprises in undertaking
exports.

0
Y
 Y

  Y


÷ndia as a destination for F.D.÷.

ð ÷nvestors are generally upbeat about the
country, but somewhat hesitant to invest
because of a perception that ÷ndia has
done less than other emerging markets to
reduce
 
  
 

 
 
. Companies operating in
÷ndia continue to face serious business
constraints.
00
Y
 Y

  Y


ð This is partly because the government has

deliberately moved to liberalize the
economy at a measured pace.
ð FD÷ caps or restrictions continue to apply
in a few key sectors.
ð eanwhile, a variety of other factors--such
as
ð excessive red tape,
ð an opaque and complex tax system, and
ð concerns about corruption--can dampen
investors' enthusiasm. 0ë
Y
 Y

  Y


ð Other types of regulations also continue

to hamper the flow of investment.
ð For example, foreign companies are
required to obtain a "no-objection"
certificate from their existing joint-
venture partner if they wish to set up a
new venture in the same line of business
in ÷ndia.

Y
 Y

  Y


ð The World Bank ranks ÷ndia 121st out of

181 countries as a place to start a
business.

ð However, ÷ndia's high level of bureaucracy

dampens interest from companies, which
like to respond quickly to market forces,
and slows down the growth of the private
sector
0G
Y
 Y

  Y


ð Besides direct corporate income taxes,

firms are subject to indirect taxes such as
ð excise duties and levies from individual
states and municipalities. The indirect tax
system is frighteningly complicated.
ð Corruption is another major deterrent.
ð ÷ndia's plethora of red tape and slow legal
system create an environment that fosters
corruption.
ð ÷ndia ranked 85th out of 180 countries in
Transparency ÷nternational's Corruption
Êerceptions ÷ndex 2008. 0Ú
Y
 Y

  Y


What is the government doing

about it?
ð Successive ÷ndian governments have
repeatedly emphasised their openness to
foreign investment.
ð ÷n 2008, the FD÷ limit in state-run
refineries has been increased;
ð the FD÷ cap in the mining sector has been
removed;
ð and foreign airlines have been given
permission to buy stakes in certain
domestic civil-aviation companies. 0Ñ
Y
 Y

  Y


ð raising the upper limit on FD÷ in private

insurance companies from 26% to 49%.
ð The government is also currently
reviewing some aspects of FD÷ policy to
ease bureaucratic controls and to define
FD÷ rules more systematically.
ð ost foreign investment has been brought
under the automatic-approval facility.

0-
Y
 Y

  Y

ð This means that companies need not obtain
permission from the government or the
central bank before investing;
ð they simply file documents ex post facto
with the central bank.
ð The government has promised to decide on
proposed FD÷ projects within 30 days.

ð The dismantling of this "licence raj" and the

computerisation of certain services have
helped to decrease corruption by reducing
the  


 required
between the private sector and the
government. 0Î
Y
 Y

 
Key issues? Y


ð Capital Flows and Balance of Êayments

ð Displacement of ÷ndigenous production

ð Extent of technology transfer

ð ÷ncome distribution

0r