Foreign capital has a key role to play in the economic development of India. It is recognized that almost third share of the investment in India is by NRI. Indian government has been continuously proceeding for economic reforms and is quiet assure to secure legislation to allow more foreign investment in areas such as insurance. On top of it, the Government knows the key role of Foreign Direct Investment (FDI) in economic development not only as an addition to domestic capital but also as an important source of technology and global best practices.
Foreign direct investment (FDI) has always played a major role in the economic development of developing nations like India after playing the leading source of external financing in 1990s. India has now become the third most favored destination for Foreign Direct Investment (FDI), behind China and the USA.
With an increase of 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197 million in 1997- 98. With this FDI inflow in the country rose nearly three-fold to $15 billion in 2006-07 as the world's second-fastest growing economy attracting investors from across the world.
The rise in FDI volume has changed the composition of market resulting investment happening in the form of acquisition of existing assets (mergers and acquisitions) growing much more rapidly than investment in new assets particularly in countries undertaking extensive privatization of public enterprises.
According to the Global Development Finance report, the net private capital flows to developing countries reached a record $647 billion in 2006 – a 17 percent increase from the year before. However, only about 8 percent of that capital flowed to the poorest 51 countries showing India as the most important of the other growth markets in Asia. The country has achieved steady economic growth, with an increase of 7 per cent in 2005 alone after starting the gradual economic liberalization process in 1991. Now the country has a liberal and transparent FDI policy.
Still the government needs to focus on the real barriers to its foreign investment goals – namely inflexible labor laws and poor roads and other infrastructure. Also there is a need for higher foreign investment, in the form of foreign direct investment (FDI) and FII. These type of investment initiates technology spillovers, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment, enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use.
Over the past few years the far-reaching measures introduced by the government to liberalize the Indian market and integrate it with the global economy are widely acknowledged. The value of foreign trade has increased substantially with increase in both exports from and imports into India. This can be justified by the statement that the total volume of foreign trade in 2001-02 was over US$ 95 billion. In addition to this, the government had announced, in April 2000, the establishment of Special Economic Zones (SEZ) policy to boost exports and attract foreign investments. Here, the SEZs would offer world class infrastructure
In the manufacturing sector, companies have consolidated around their area of core competence by tying up with foreign companies to acquire new technologies, management expertise and access to foreign markets. The cost benefits associated with this sector have positioned India as a favorite destination for manufacturing and sourcing for global markets. In the financial sector it is required that public policy should be focused on maximizing benefits achieved by the growing involvement of foreign firms by encouraging diversity and competition not only between foreign and domestic banks but also between banks and financial institutions. Whereas, smooth functioning of the market for corporate control would be assisted by greater international compatibility of accounting standards, takeover rules, and insolvency codes.
Certain projects coming from the Reserve Bank or the Securities and Exchange Control of India or Sebi can come through without any barriers or permission. India could thus be said to be opening up to genuine investors.