A country needs natural resources, adequate levels of savings, latest technical know how, skilled human resources etc. for economic development.  Compared to developed countries, developing countries are deficit of  these resources. Lack of resources and skilled labor forces may prompt them to seek assistance from economically well developed countries. Assistance may be in the form of either technical knowledge or investments and very often, both. It may be through collaborations with foreign countries or private companies.  In India, such collaborations have always been predominant from the time of independence itself. Government has always welcomed such foreign investments with some restrictions giving new paths of co-operation. Also, its policy has undergone several changes since independence. Foreign investment policy has a direct impact on inflow of foreign money, skills and knowledge.

What are the merits of foreign capital?

No doubt, a developing country like India has many reasons to welcome fund inflows that can play an important role in the economic development of our nation.

1. Some natural resources may go unnoticed or unexploited in the absence of technology. So, welcoming new ideas can help in the effective use of resources and prevent them from going to the waste.
2. Also, new technologies can help in upgrading present techniques giving more result thus saving man power, money and time.
3. When new technologies are welcomed, employment opportunities also are created. So, it gives many employment opportunities, particularly to new professionals with new ideas. So, skilled labor force can be used in a better way.
4. They can supply domestic savings and capital formation thereby accelerating the investment rate for the economic development of the country.
5. New technologies can bring new markets and marketing experts too, thus helping to sell Indian goods in international markets for good prices.
6. Backbone of development of a country, of course, is agriculture and industry. Foreign capital can provide infrastructure for both. 

Foreign investment policy in India

Investment policy of India can be broadly classified into two periods – 1948-1990 and 1991 onward. Till 1990, there were only restricted policies and regulated inflows. But from 1991 onward, India witnessed liberalization of foreign investment laws.

The restrictive period – 1948-1990

At First, the policy of independent India was reflected in Industrial Policy Resolution (IPR) which fully accepted the participation of foreign capital, particularly with new technology ideas to promote industrialization in our country. But certain regulations were also attached which required ownership and control in Indian hands. In 1949, the then Prime Minister of India, Pt. Jawahar Lal Nehru made a statement in constituent assembly bringing three major issues namely, no discrimination between foreign and Indian enterprises, fair compensation to foreign investors if need arises for the nationalization of a foreign enterprise and also allowed them to remit profits if foreign exchange position allowed. Also, foreign collaborations were encouraged in those industries which required large capital investments, production skills and processes, export industries and those which were needed for country’s development as a whole. Also, foreign collaborations with equity participation were appreciated which led to the sharp increase in its number. Thus, country witnessed outflow of profits, dividends, and royalties which led to foreign exchange crisis in the late sixties.

Foreign Exchange Regulation Act (FERA) of 1973 is an act to consolidate and amend laws regulating transactions indirectly affecting foreign exchange payments, currency exchange and conservation and utilization of foreign exchange resources of the country. It included all non-banking companies and branches with more than 40% foreign participation. During late seventies, India realized its poor technology and products as compared with other nations. This was partially due to a highly protected local markets and MNCs. However, Industrial Policy Statements of 1980 and 1982 gave a liberalization of licensing rules and some exemptions under FERA.

Liberalization period- 1991 onwards

Introduction of new industrial policy in 1991 led to many radical changes in foreign investment policy. To promote foreign funds and investments, many restrictions were removed and encouragement like tax exemptions also given. It virtually welcomed foreign investors to almost every sector of India, even renting foreign participation with advanced technologies and adding new skills. Unlike in the past, our country is promoting international business and investments even through Government delegations visiting other countries. They are trying to attract foreign investors to invest, seeing it as a part of industrialization and exchange of new ideas, skills and better use of resources, both human and non-human.

India’s foreign investment policy has come a long way since 1947. Though they were warmly welcomed at first to promote rapid industrialization and foreign fund, certain restrictions and selections were made later. But, since India’s technology did not improve as years passed by and conditions only worsened more, further liberalization of foreign policy became necessary to attract more investors to India. But often a question is raised as to whether foreign technology and investments help India in long run or adversely affect our economy.  But everyone agrees that India is far behind in the proper utilization of resources and skilled people purely depending on foreign technology a lot. While many developing countries like Japan and China are coming forward with many innovative ideas, we are just depending on them, thinking how can we import their commodities at cheap rates and market it here, fooling ordinary man. Disputes won’t send by adding a single point or two.