Foreign Direct Investments constitute the major source of capital inflow. FDI represents investments by foreign entrepreneurs/companies in Indian industry and business, either in the existing ventures or in new enterprises to be promoted. Foreign investors bring advanced technology along with such investment. Many firms are also able to induct better management and market practices in the business ventures they undertake.

But why should foreigners choose to invest in India in preference to their own countries? There are a number of reasons. The main reason is comparative advantage in cost of production. investment in India provides a better return than in their own countries. India provides abundant supply of skilled and cheap labour force. The country is English speaking and it has a stable and independent judiciary. India has 30 million of middle income consumers and this provides a large market. In addition to that by producing in India, the foreign companies will be able to export to other countries, availing the benefit of production at lower cost. In the Eighties Suzuki Motors of Japan established Maruti Udyog Ltd in India. Within a short time it has overtaken the existing domestic players and secured a sizeable share (presently over 50%) of the Indian passenger car market.

Because of the favourable location of India, it is advantageous for major industries of Europe and USA to establish units in India to supply to the huge markets of Asian countries. India is the favoured destination for labour intensive enterprise including back office operations of existing established industries in these countries.

India has now established itself as a major IT power. It has abundant supply of trained and talented IT professionals. This has attracted major IT companies of USA like IBM, INTEL, Microsoft to shift part of their activities to India.

In addition to commercial considerations what are the other factors that prompt foreign investors to seek a footing in India? Foreigners make an objective assessment of the various risks involved in investing their funds in India.

India is a stable parliamentary democracy with a tradition and continuity or over fifty years now, after obtaining freedom from British rule. There is no serious revolutionary movement in India; hence there is no conceivable threat to our democratic and parliamentary form of Government. The Indian constitution guarantees fundamental freedom and rule of law. Sovereign Risk in India is therefore considered zero for both "foreign direct investment" and "foreign portfolio investment."

India has a multi-party political system. But the stability of the government is not adversely affected. In fact after initiation of economic reforms in 1991, India has underwent change of Governments on three occasions, first the Congress Party, later the coalition of United Democratic Parties and presently by a coalition of National Democratic Parties. In India change of Government implies change of personalities governing the country, but not the cantours of its major policies, in particular its foreign policy and economic policy. All the three governments have shown themselves as ardent supporters of economic reforms. Instability even for a few years due to the failure of any party to win an absolute majority in Parliament has not happened. Basic policies of the country are peace, freedom, and friendliness to all. There is no record of the country having gone to war with another country during the last thousand years. India has accepted globalisation and tiered its economy accordingly , i.e. integrating the Indian Economy with the Global economy and following market driven economic policies. Foreign investors do not face any threat of political risk.

The multiple party political set up with national level parties and several regional parties has resulted in frequent change of Governments in the past, and may happen in the future also.

But political instability in India, in practical terms, posed no risk to foreign direct investors because no policy framed by a past government has been reversed by any successive government so far. You can find a comparison in Italy which has had some 45 governments in 50 years, yet overall economic policy remains unchanged. Even if political instability is to return in the future, chances of a reversal in economic policy are next to nil.

Indian industry was cut-off from world competition and fully protected before the advent of economic reforms. A foreign investor coming to India and investing in new industries employing advanced technology faces no commercial risk. We can quote the example of Maruti Udyog Ltd set up by Suzuki of Japan. Suzuki came to India with a superior technology and was able to secure a major chunk of the market for passenger cars within a short time.

India is a major power and has friendly ties with all countries of the world, in particular the G8 countries. The peace loving and no-war policies of the Government is a guarantee that it will face no economic sanction in future. It did face such sanctions recently after the nuclear tests, but it was for a brief span of time. The major powers of the world are convinced that India is a stable country and poses no threat to others.

While the foreign investor perceives no threat or risk in respect of investment, it is also a fact the flow of investments coming to India is still inadequate compared to the potential and opportunities available in the country. The reasons for this are as under:

1. Our country is a late starter. Reform process started in India only from 1992 and picked up momentum by 1995-96. In the face of this Countries like China, South Korea, Taiwan, Malaysia were actively pursuing foreign investments since the early Eighties.

2. It is generally complained that the phase of Reforms in India is rather slow. After initial start, progress became slower, at times coming to a grinding halt. Before the advent of Reforms the Country did have a totally closed economy controlled and directed by the State. The bureaucracy in India is unwilling to shed its draconian powers. There are several other vested interests. Organised trade unions are fighting against labour reforms and disinvestment policies of the Government.

3. While the country has an independent judiciary and enforces rule of raw, the process is extremely slow. The laws are more suited in extending safeguards to the offender, against the law-enforcer. Legal reforms is extremely slow

4. The country has inherited a vast array of inefficient and loss making or low profit making public sector units. The attempts of the Government to disinvest these units is beset with obstacles from vested interests and the process is slow.

5. The ruling NDA Government is composed of 17 parties, many of them with regional bias or sectarian bias. The government has to reconcile the contradictions faced in this.

It is a common experience that the Government is forced to function slowly on account of roadblocks within the Cabinet composed of several parties representing the NDA. The disinvestment of HPCL, IOCL, MTNL, BSNL, IA, AI, NALCO were all have to be deferred on account of opposition from within the cabinet. Some of these proposals like NALCO attracted wide foreign interests and such bidders themselves withdrew later, disappointed at the record of the Government.

* : Includes acquisition of shares of Indian companies by non-residents under Section 5 of FEMA,1999. Data on such acquisition have been included as part of FDI since January 1996

Source: Reserve Bank of India

The statistics above indicate that there was increase in the inflow of FDI initially upto 1996-97, but subsequently either it started reducing or stagnating. The aim of the Government to attract FDI of 10 billion US $ is far away from reach. However after completion of the elections for four States in 2003 and the election for the Parliament in 2004, the new Government may be able to do better. Major investments in infrastructure development (Roads, Railway, Ports, Airports etc.) are expected to start showing results from 2005 onwards. This is sure to provide a momentum for economic growth.