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Indian Economic Policy

Notes later period 1995-96 to 2002-03, direct investment flows picked up and they accounted for quite
a significant share and from 1997-98 and 1998-99, direct investment became dominant. It may
also be noted that portfolio investment is of a very undependable and volatile nature. This is
witnessed by the fact that portfolio investment slumped to a level of US $ 1.83 billion in 1997-98
as against 3.31 billion in 1996-97 and became negative in 1998-99. The sudden fall of portfolio
investment to a negative level resulted in the total inflow declining from US $ 6.13 billion in
1996-97 to $ 2.40 billion in 1998-99. This only highlights the fact that although foreign investment
is welcome, it would be more desirable to depend on inflows of foreign direct investment. The
sharp decline of portfolio investment from $ 3,026 million in 1999-00 to a low level of 979 million
in 2002-03 and then a sudden spurt to $ 11,377 million in 2003-04 and again a decline to $ 9,315
million in 2004-05 is indicative of its volatile and undependable nature. Portfolio investment
again sharply increased to in 2005-06 to $ 12.492 million (64%) to again decline to $ 7,003 million
in 2006-07 accounting for merely 24 percent of total foreign investment, and further increased
to $ 27,271 million during 2007-08. But due to economic crisis if became negative SI3.855 million
during 2008-09. In 2009-10 we find a record foreign investment of $ 70,139 million as portfolio
investment reached its record and direct investment was also very high at $ 37,763 million. In
2010-11 provisional figures for foreign investment was put at $ 5,84,95 million.
10. Reduction of Regional Disparities
One of the major objectives of development is to reduce regional disparities. With this end in
view, State policies have been patterned to help the backward regions. It was also included as
a part of the devolution of funds and higher allocations were made for the backward states so
that regional disparities could be narrowed down.
The reform process initiated in 1991 has been emphasising the use of the market forces, which
naturally attract investment to regions more developed in infrastructure - both economic and
financial. It does not pay any attention to the question of regional imbalance.
It would be, therefore, desirable to understand the impact of economic reforms on various states.
An analysis of the growth of the Net State domestic Product (at 1993-94 prices) for the post-
reform period reveals that NSDP in forward states indicated an annual average growth rate of
5.6 per cent during 1990-91 and 2002-03. but as against them in the backward states, growth
rate of NSDP was merely 1.7 per cent. This only underlines the stark reality that the reform
process helped the forward states much more than the backward states and could be held
responsible for widening regional disparities. It may also be noted that in Bihar, the per capita
NSDP growth during 12-year period (1990-91 to 2002-03) was negative to the extent of (–) 0.9
per cent per annum and in Uttar Pradesh, it was barely 0.4 per cent. These two states which
account for about 27 per cent of the population pulled down the average all-India growth of per
capita NSDP. The ratio of maximum and minimum per capita NSDP which was 2.7 in 1990-91
increased to 4.73 in 2004-05 which also supports the fact that the reform process widened income
disparities among the states. However period after 2004-05 shows some imoprovement in the
performance of backward states and this ratio declined to 4.2 in 2008-09.
Dr. N. J. Kurian of the Planning Commission who made an extensive study of the “Widening
Regional Disparities in India” has indicated that more than two-thirds of investment proposals
(69.2 %) in the post-reform period were concentrated in the forward states and a similar situation
prevailed in terms of financial assistance disturbed by All-India Financial Institutions as well
as State Financial Corporations. The All India Financial Institutions viz., IDBI, IFCI, ICICI, UTI,
LIC, GIC, IRBI and SIDBI disbursed 67.3 per cent of total financial assistance to forwards states
upto 31 March 1997. Even among the 9 forward states, four states, namely Maharashtra, Gujarat,
st
Tamil Nadu and Andhra Pradesh were able to appropriate about 51 per cent of total assistance.
Even in the case of State Financial Corporations, 70 per cent of total assistance was received by
forward states. This analysis underlines the fact that the reform process has favoured the forward
states in terms of approval of investment proposals as well as financial assistance. Consequently,
the already betteroff states can further accelerate the growth process while the backward states
being unfavourably treated face a retardation in growth. This explains the growing disparities
in terms of growth of NSDP — both total and per capita.

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