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Unit 23: Role of Foreign Capital - FDI and Multinational Corporations

need to ensure that in all cases of foreign collaboration, the majority interest was always Indian. Notes
Later, this was followed by the Fiscal Commission of 1949-50. The Commission recommended that
foreign investment may be permitted, first, in the public sector projects needing imported capital
good. Moreover, in new capital industries where no indigenous capital or technical know-how was
likely to be available. It may be noted that a statement on policy towards foreign capital made by the
Government on April 6, 1949 was brought after this. The underlying principles of the policy by and
large are valid even now. The policy tried restrict foreign collaboration to those cases which would
bring technical know-how into the country such as was not available indigenously for developing
new lines of production in the country. These define the broad contours within which the state policy
towards foreign capital has been framed all through the different five-year plans. Three distinct
phases can be marked during the plan period :
• From 1951 to 1965, the policy was characterised by a liberal attitude towards foreign capital
providing many concessions and incentives.
• In the second stage, strict controls were observed and the broad policy was to restrict the area of
operation of foreign capital in the economy.
• With the beginning of economic reforms in 1991, the country has adopted a more liberal attitude
and has tried to attract a free flow of FDl in India.
Policy Changes 1991-2005 : Regarding foreign investment and foreign technology Agreements, the
new Industrial Policy, 1991, can be described as a minor revolution. There are four types of changes
in the policy :
1. Choice of Product : The number of products has been significantly increased.
2. Choice of Market : Free competition allowed with the domestic producers.
3. Choice of Ownership Structure : The foreign investor is broadly free to own a majority share
in equity of the business.
4. Simplification of Procedures : Two routes for FDI inflows have been opened : The RBI route
(or the Mumbai route) and the Foreign Investment Promotion Board (FIPB) route (or the Delhi
route). The RBI route is transparent in the sense that the guidelines are clear. Thus, if projects
satisfy the guidelines, the approvals are practically automatic and speedy. It consists of 42
industries for FDI proposals and are listed in Annexure III of the industries list. The Foreign
Investment Promotion Board (FIPB) route (or the Delhi route) entertains the cases which do not
fit into the first case. These proposals by the foreigners are considered case by case. These
changes mean that the Government is keen to attract more of foreign investment and apparently
believes the following:
• To go out to borrow is worse than allowing equity.
• While profit is usually reinvested, the capital is generally never repatriated.
• FDI brings technology which spreads to other sectors. These firms produce cheaper and
better capital goods or intermediate products. There is competitiveness of sectors which
spurs development and accelerates the growth process in the economy.
23.4 Critical Evaluation of the New Policy

The foreign investment environment in India has been improved by the economic reforms and the
success of the new economic policy depends in a large measure on the liberal response of the foreign
capital. The response of the foreign capital to the policy Initiatives can be described as follows :
It may be noted that the response of the foreign capital has not been ungrudging and the performance
has been far below expectations. At present, there are less than 40 of the top 100 MNCs operating in
India.

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