An evaluation of foreign capital in India-since trade liberalization

Abstract

Foreign capital can be obtained either in the form of concessional assistance or non-concessional flows of foreign investment. Concessional assistance includes grants and loans obtained at low rates of interest with long maturity period. Such assistance is provided generally on bilateral basis (government to government) or through multilateral agencies like the World Bank, International development association etc. Loans have generally to be repaid in terms of foreign currency but in certain cases the donor may allow the recipient country to repay in terms of its own currency. For instance, the U.S. government allowed the Government of India to repay loans under PL480 in terms of rupees. Grants do not carry any obligation of repayment ad are mostly made available to meet some temporary crisis. Non-concessional assistance includes mainly external commercial borrowings, loans from other governments/multilateral agencies on market terms and deposits obtained from non-residents. Foreign investment is generally in the form of private foreign participation in certain sectors of the domestic economy. The main advantage of this form of assistance is that generally the foreign investor also brings with him technical expertise, machines, capital goods, etc. which are scarce in developing countries. The disadvantage is that a large part of the profits are repatriated to the foreign investor. If the developed country in question chooses to depend too much on private foreign investment, it would be risking too much interference in the conduct of its affairs. This would be against the long-term interests of the country.