Foreign Capital

Summary

Kiran Nanda, Chief Economist of Gujarat Ambuja Cements, delivers a Forum of Free Enterprise booklet based on her keynote address at a Bombay seminar on “FOREIGN CAPITAL & GLOBALISATION” in September 1995. She argues that the opening of the Indian economy to foreign capital — central to the New Industrial Policy of 1991 — is indispensable if India is to lift growth from 5–6 per cent to 7–8 per cent. Foreign capital, in her telling, plugs the savings-investment gap, especially in infrastructure (roads, power, telecoms, railways requiring at least $200 billion over a decade), modernises industry, brings managerial and marketing skills, and helps reorient the work culture toward international competitiveness.

The booklet walks the reader through the architecture of the post-1991 reforms: 51 per cent foreign equity in 34 high-priority industries, amendment of FERA, tariff rationalisation, current-account convertibility, MRTP dilution, GDR issuance, and FII directives. Nanda surveys the numbers — FDI approvals rising from Rs.5.3 bn in 1991 to Rs.118.6 bn in 1994, NRI share of FDI above 30 per cent, the four-state concentration (Maharashtra, Delhi, Tamil Nadu, West Bengal) of inflows, and the comparative position of India vis-à-vis China as a “Big Emerging Market.” She notes that the public sector’s grip is loosening: only atomic energy, coal and lignite, and mineral oils remain reserved.

A substantial middle section addresses contested questions: whether Indian industry is being discriminated against (she lists non-tariff barriers, high interest rates, and a labyrinthine bureaucracy as genuine handicaps), whether foreign capital is inflationary (depends on end use), whether it substitutes for domestic savings (it supplements them while bringing technology and systems), and the impact on the Rupee (mild depreciation unlikely to scare FIIs that already price in 4–5 per cent currency loss). She is critical of ad-hocism in policy, the Enron Project controversy, depleting forex reserves, and the persistent fiscal deficit, while welcoming the Depositories Ordinance, Bilateral Investment Treaties, and the Finance Minister’s promised arbitration and insurance reforms.

Nanda closes with measured optimism — “only two cheers” for the new economy policy, with the third reserved for when reforms acquire irreversible momentum. The signpost, she warns, is not the destination; foreign capital can provide temporary growth, but India must set its own house in order through SEB reform, infrastructure delivery, and a clear long-term policy framework.

Key points

• Foreign capital is required to lift Indian growth from 5–6% to 7–8% p.a. and finance the $200 billion infrastructure need over ten years.

• Post-1991 reforms — 51% FDI automatic approval in 34 industries, FERA amendment, tariff rationalisation, current-account convertibility, MRTP dilution — provided the main boost.

• FDI approvals rose from Rs.5.3 bn (1991) to Rs.118.6 bn (1994), aggregating Rs.397.5 bn in the post-liberalisation period; actuals are about 28% of approvals.

• Inflows are concentrated in four industrialised states (Maharashtra, Delhi, Tamil Nadu, West Bengal) and in fuels, metallurgy, chemicals, services and food processing.

• India and China are now jointly courted as Big Emerging Markets; NRIs make up over 30% of FDI and could replicate the Chinese-overseas-investor pattern.

• Crucial debates surveyed: alleged discrimination against Indian industry, the inflationary potential of foreign capital, its relation to domestic savings, and pressure on the Rupee.

• Persistent constraints — high tax structure, weak infrastructure, poor labour relations, IPR protection gaps, ad-hoc policymaking, and the fiscal deficit — could choke the inflow.

• Reforms must accelerate via corporate-tax harmonisation, Company Act revision, faster government clearances and a clear long-term policy framework; foreign capital alone cannot fix infrastructure.