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Sunday, March 30, 2003
Books

On foreign capital inflows
G. K. Pandey

Foreign Investment in India
by Chanchal Chopra. Deep & Deep Publications
Pvt. Ltd. Rs 850.

Foreign Investment in IndiaIT is an in-depth study of foreign investments in India with all its ramifications. Chanchal Chopra has dealt with this ticklish issue intelligently and cogently.

After discussing the pros and cons relating to foreign capital, the author has concluded that in order to accelerate the pace of development the tempo of foreign investment will need to be stepped up. The book presents an emerging scenario in India with regard to different types of foreign capital inflows. It examines the trends and patterns of foreign investments in the country in the pre-and post-liberalisation periods vis-`E0-vis the major policy changes during these times.

The author has looked carefully into the India’s requirements of foreign capital and estimates the dependence of the Indian Cooperate Sector on foreign sources. A detailed analysis has also been provided regarding the performance of Indian subsidiaries of foreign companies operating in India. Quite vividly Chopra points out to the possible implications of policies being pursued while identifying the factor, which influence the foreign capital inflow.

The two-gap model, which is often used in development economics, shows that developing countries typically encounter the problem of increasing their savings to match investment needs and that of financing imports through export earnings. The first problem arises from the saving gap, whereas the second problem arises from the foreign exchange gap. It is often argued that foreign investment, especially foreign direct investment (FDI), contributes to the filling of these gaps. It has been established that the net impact of FDI on the quantum of capital flow to developing countries has been positive. The basic advantage of FDI over other sources of finance is that it is more stable than other financial flows and represents a long-term commitment to the host country. This investment is easier to service, argues Chopra.

 


Besides, studies have revealed that FDI is an important vehicle for the transfer of technology, thus contributing to growth of the host economy. To be competitive, FDI has to be more productive than the domestic investment and therefore, it develops minimum threshold level of human capital. FDI also contributes to an increase in the rate of investment in the economy.

However, as opposed to FDI, observes Chopra, portfolio investment does not represent any commitment except profits. By investing in fast-growing companies, the investment creates price anomalies. Since portfolio investment represents short-term inflow of capital, therefore it creates volatility in stock as well as in the foreign exchange market.

In the light of those controversies and when developing countries are competing for foreign investment, a detailed perspective on foreign investment is gravely needed. It is in this light that the study "Foreign Investment in India: Liberlisation and WTO-The Emerging Scenario" by Chopra is timely and relevant. The study sheds light on the significance of foreign investment for emerging markets. She aptly describes how foreign investment helps in the economic development of host country by increasing financial resources, providing technology and enhancing professional skills and deliberates on theoretical underpinnings. The study elaborates on the changing policy perspective on foreign investment in India. The statistical profile and analysis provided in the study is revealing.

The chapter on non-resident Indians investment in India is thought provoking and provides the policy variables to attract NRI investments. The study also discusses the role of foreign institutional investors (FII) in the stock market developments and analyses how Euro issues phenomenon has emerged after liberalization so that the industry is able to mobilize finance at competitive cost. The study deliberates how the firms shifted from Euro issues to external commercial borrowings A chapter on the tax-related issues in respect of foreign investment discuses how the tax incentives to FDI make the investment competitive against domestic companies. In the next chapters, Chopra models foreign direct investment and portfolio investment, where she discusses the determinants of two types of investments. After discussing the macro-economic impact of portfolio investment, she indulges in the discussion on the impact of foreign direct investment in India.

Since the WTO regime is to be fully operational in coming two years, she discusses the flow of investment in the context of TRIMs, GATs, TRIPs and highlights the implications of proposed agreements on FDI. Finally, Chopra concludes the study with observations and policy implications of the study.

Besides significance of direct foreign investment, the book includes statistical profile and analysis, investments by NRls, foreign institutional investors and the stock market development in India. The chapters on the changing Foreign Investment: The Policy Challenge for Developing Countries; Significance Of Foreign Investment in Emerging Economies and the Globalization Process; Foreign Direct Investment and the Economic Development of Host Countries and India’s Policy towards Foreign Capital are really thought provoking.

The book would be of immense use to all interested in the study of foreign investment in India and to the policymakers and students of management, commerce and economics.