In the previous article we studied the importance of savings in building capital and prudent investment thereof for the vibrant growth of the economy of the country. The country attained independence in the year 1947. After 55 years of independence what is the record of the Government of India in fulfilling these objectives?

Several steps were taken by the Government of India to promote and mobilise domestic savings and in channeling such savings in productive sectors. Major achievements are the nationalisation of the commercial banks and creating a vast network of branches in different part of the country. Aggregate deposits of Commercial banks which were around Rs.5300 Crores in 1969 (at the time of nationalisation) were able to reach the astonishing figure of Rs.1 Lakh Crores in 2000 A.D. The country was able to usher the green revolution, and remarkable progress in subsidiary occupations like dairy development. Rapid industrialisation of the country changed its face, thanks to setting of all India Financial Institutions like IFCI, IDBI, ICICI. The efforts of these institutions were supplemented by other institutions like LIC, UTI, GIC and the State level financial Corporations and Industrial Development Corporations. Overall growth of the economy reduced the below poverty segment of society and resulted in a prosperous middle class community of 30 million in the country. What then was the reason for the unprecedented economic crisis of the year 1991.

Today the Government of India realises the indispensability of attracting a regular inflow of foreign investment to supplement indigenous efforts towards growth and development of the economy. We have a Foreign Investment Promotion Board at the highest level of the government to clear such projects, which do not come under the automatic route of the RBI. But this focus of our policy is only after 1991, when the Reforms started. What was the approach of the Government earlier? It is a fact that earlier in post independent India foreign assistance was considered a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects. Gradually this rigid approach softened. The main reason of the economic crisis of 1991 was due to dearth foreign exchange resources to pay for our import bills. Too heavy investments were made in the public sector proved unproductive. Over-bureaucratisation of the administrations, resulting in inspector-raj and licence-raj, kept growth at low levels around 3% p.a. When the crisis developed and we reached a near bankrupt stage, the truth dawned on the government. We will study the evolution of our policy towards foreign investment in the next few chapters.

Having decided that inflow of foreign capital is necessary for the growth of our economy, it is now time to consider the promotional steps taken by Government of India to implement the new policy decision. We will therefore be studying in this project the different types of inflow of foreign capital, the terms and conditions governing them and the steps being taken by the Government to make Indian investments an attractive proposition to foreigners in general.

Foreign exchange inflow and outflow is on account of several factors. All these are not investments. Example- remittances on account of foreign trade, travel etc. These are transactions in the current account. Investments coming inwards are under the Capital Account. Certain investments are identified as direct investment (i.e. Foreign Direct Investment or FDI). These are remitted in favour of identified beneficiaries in India. Examples of such direct investments are -

• subscription by foreign nationals to public issues of Indian Companies,

• remittances for setting up their branches/organisations in India by Foreign Institutions,

• remittances by NRI for investment in Bank deposits, Stock exchange securities, mutual funds, unit trust of India,

• remittances by NRI for purchase of immovable properties in India etc.

What are not direct investments. When remittances are made by Foreign Institutional Investors for Portfolio investments, such remittances are on trading account, as securities can be bought, as well as sold back through approved stock exchanges. This may be trading transaction, but net amount at any time (purchases minus sales) is of a significant figure and this adds to the foreign exchange reserves of the country. Foreign Currency inflow is also received through external commercial borrowings.

We will therefore analyse the inflow of foreign investments under the following titles:

1. Foreign Direct Investments under the automatic route of RBI and the approval of FIPB (Foreign Investment Promotion Board)

2. Investments through Global Depository Receipts (GDR)/American Depository Receipts (ADR)

3. Portfolio Investments by Foreign Institutional Investors

4. Bank deposits by NRI (Non Resident Indians) and PIO (persons of Indian Origin)

5. Portfolio investments by NRI, investments in Mutual Funds, Units of Unit Trust of India etc.

6. Purchase of Immovable properties by NRI in India

7. External Commercial borrowings