The economic reforms of 1991 opened the Indian economy for foreign players. For FDIs, India has now become a hot destination because of its vast potential. The Indian investment setting is constantly changing and the country has become the third most preferred destination for investors after China and the US. This note places recent trends in FDI inflows and policy changes in a historical context, and assesses the role that foreign capital can play in continuing economic growth.
The last 15 years have seen a marked increase in foreign capital inflows into India both in foreign direct investment and in portfolio investment. The inflows into portfolio investment mostly relate to diversified equity holdings, and tends to be relatively volatile. This trend represents a break from the previous two decades. While foreign investment flows were significant in the 1950s and 1960s, FDI inflows were meagre in the 1970s and 1980s. Figure 1 highlights the recent growth in inflows.
Of course, India is not unique as a recipient of increased inflows in the recent period. At around US$3.2 bn in 2002, FDI in India was less than 1% of its GDP in 2002. In contrast, FDI inflows to China were nearly US$47 bn in 2002, or around 3.7% of its GDP. On the whole, FDI inflows to India remain small in relation to its economy. |
