The country attained freedom in 1947, after two centuries of foreign rule and protracted freedom struggle stretched over decades. The prevailing mood at that time was one of preserving and consolidating the freedom and not to permit once again any type of foreign domination, political or economic.

The evolution of the economic policies in the post-colonial period was conditioned by three sets of economic agents, the State as the harbinger of industrialization in the country, the indigenous business interests and the foreign capital. Initial approach on foreign capital was negative to a not-interested attitude. Prime Minister explained that "the stress on the need to regulate, in the national interest, the scope and manner of foreign capital and control (as per the IPS 48) arose from the past association of foreign capital and control with foreign domination of the economy of the country." This reflected the adoption of the Industrial Policy Resolution of 1956, where a dominant role for rapid industrialisation of the country was entrusted to the public sector.

Ground realities and exigencies compelled the Government before long to start progressively modifying the negative stand on the need for foreign capital for the growth and progress of our economic development. The country was already having a cluster of industries (under textiles, jute, sugar, Tyre etc.) owned by British Nationals. Government wanted that these industries should continue and function smoothly after independence. The Industrial Policy Statement of Government, presented in April 1948, contained signs of a positive change in attitude towards foreign capital. The Industrial Policy Statement argued that foreign capital was valuable in bringing resources for development and that it also provided technology and knowledge for rapid industrialization of India. Foreign capital, on the other hand, was given to understand that "conditions under which they may participate should be carefully regulated in national interest." It was further stated that foreign capital would be regulated under a new legislation. The proposed legislation under IPS 48 was to provide for "scrutiny and approval by the Central Government of every individual case of participation of foreign capital and management in industry." On specific issues it spelt out that:

1. as a rule the major interest in ownership and effective control, should always be in Indian hands; and

2. the training of suitable Indian personnel for purpose of eventually replacing foreign experts would be insisted upon.

The issues were sought to be clarified by the Prime Minister, Jawaharlal Nehru in his statement to the Parliament on April 6, 1949. To dispel fears, especially in the mind of the British capital in India, the Prime Minister stated as under:

"I should like to add a few words about British interests in India which naturally form the largest part of foreign investments in India. Although it is the policy of the Government of India to encourage the growth of Indian industry and commerce (including such services like banking, shipping and insurance) to the best of their ability, there is and will still be considerable scope for the investment of British capital in India. These considerations will apply equally to other existing non-Indian interests. The Government of India has no desire to injure in any way British or other non-Indian interests in India and would gladly welcome their contribution in a constructive and cooperative role in the development of India's economy."

Prime Minister explained that India, with low level of domestic savings rate, needs foreign capital to undertake larger investments for rapid industrialization. Foreign private capital was also important because "in many cases scientific, technical and industrial knowledge and capital equipment can best be secured along with foreign capital". The Prime Minister also assured the foreign capital that:

1. the government do not intend to place any restriction or impose conditions which are not applicable to similar Indian enterprises.

2. the Government would also so frame their policy as to enable further foreign capital to be invested in India on terms and conditions that are mutually advantageous.

3. the Government does not foresee any difficulty in continuing the existing facilities for remittance of profits;

4. the Government has no intention to place any restriction on withdrawal of foreign capital investments.

5. in case of compulsory acquisition of any foreign concern, compensation will be paid on fair and equitable basis.

The role of foreign capital was stressed again in the First Five Year Plan in 1951. The Plan said that the Government's policy in this regard gives the following assurances to foreign capital:

1. there will be no discrimination between foreign and Indian undertakings in the application of general industrial policy;

2. reasonable facilities will be given for the remittance of profits and repatriation of capital, consistently with the foreign exchange position of the country; and

3. in the event of nationalisation fair and equitable compensation would be paid.

But despite the change in official policy towards foreign capital from 1949, inflow of new investments from abroad did not take place in any significant manner. The second survey of India's Foreign Liabilities and Assets conducted by the Reserve Bank of India in 1953 (the first survey was conducted in 1948) showed that foreign business investments in India increased by about Rs.130 crores between June 1949 and December 1953. In 1954, it was reported that there had actually been a disinvestment since 1945 of about Rs. 35 crores.

The trend of low participation by foreign private capital was seen throughout the period 1947-57. Two factors were primarily responsible for this situation. The first was the absence of a clearly defined industrial strategy in the First Five Year Plan where the emphasis was laid on the development of infrastructural facilities in the country. The second factor was the initial hesitancy of the indigenous capitalist class to collaborate with foreign private capital in the immediate post-independence phase.

When the implementation of the second Five Year Plan (1956-61) had begun, the policies of the Government towards foreign private capital started becoming more accommodating. A number of factors contributed to the change. The first was the programme of industrial development that was taken up in the Second Five Year Plan, we had alluded to above, which brought in its wake the problem of providing resources. The second was the concern of the Government at the rapidly depleting foreign exchange reserves, accumulated after the Korean War Boom. And the third, the most crucial determinant, was the role of the external influences, like the World Bank, and later by the United States Agency for International Development (USAID), in influencing the economic policies of the Indian Government.

The feature of this phase was a larger inflow of foreign private capital as compared to the earlier period, a trend that was maintained till the middle of the Third Five Year Plan. By 1958, at least seven of the seventeen industries that figured in the Schedule A of IPR, 56, which included industries that were to be exclusively under State control, were opened to private interests. These industries included armaments, heavy machinery and heavy electrical plant. A much greater shift in policy was seen in the case of the Schedule B industries, which, according to IPR, 56, were to be progressively state owned. Of the twelve industries included in the Schedule B, in as many as nine industries private sector was in the forefront in setting up new units. Although these changes in official policy were beneficial to the private sector in general, the actual beneficiaries were foreign controlled companies and to that extent the changes can be interpreted as a shift in favour of foreign capital.

The changes had been influenced by three factors, (a)the resource needs of the economy for industrialization, (b) the foreign exchange crisis, and (c) the external influences. The inter-relationship between the first two factors mentioned above is quite obvious. The resource needs for industrialization as viewed by the Government was quite intimately linked to the foreign exchange position in the economy.

The view of the representatives of Indian business interests regarding the importance of foreign capital appears to have been endorsed by the Government as it started seeking funds from bilateral and multilateral agencies like USAID and the World Bank. This move of approaching the World Bank gave rise to the second compelling factor behind the change in the Government's policies. It is a well known fact that the World Bank provides credit only after certain broad policy initiatives are taken by the host countries regarding foreign capital. The World Bank's official position on the role of foreign capital was made clear in the Report of the Banker's Mission to India and Pakistan in 1960. The report suggested that if aid seeking Governments were to use the potential sources of aid to the full they would have to create conditions which would attract private capital from abroad.

The process of liberalization of Government policies in respect of foreign capital continued in the 1960s. In May 1961, a press note issued by the Government on the role of foreign private capital stated thus, "Basically, the policy regarding foreign investments would be to attract private foreign capital in those fields, in which the country needs to develop in pursuance of the Plan targets. While Government have been encouraging the investment of private foreign capital in the country, it is to be recognized that this has necessarily to be on a selective basis.

If any projects is approved for development in the private sector and, if imported plant and machinery are required, foreign capital investment would ordinarily be welcome as a form of financing the project. While Indian majority holding would be generally welcome, the ratio of foreign capital in joint venture enterprises, the extent of foreign share holding that is to be permitted in any case etc., have necessarily to be judged on merits. This judgment is made after evaluating the technical skills offered and after weighing the requirements of foreign exchange for the purchase of equipment from abroad and the desire of Indian collaborators to play an effective part in the company's management."