Economic reforms and foreign investment inflows, Microeconomics

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Economic Reforms and Foreign Investment Inflows:

A major objective of economic reforms was to increase foreign investment, which helps to increase capital formation of the economy without creating foreign debt. Foreign investment flows take two forms - foreign direct investment and portfolio investment. Foreign direct investment figures show that it has been gradually increasing from $129 million in 1991-92 to $3,557 million in 1997- 98 and rising to a peak of $6,130 million in 2001-02 and then declining to $4,673 million in 2003-04. But as against it, foreign portfolio investment which is considered to be hot money, has shown violent fluctuations. It increased from $0.24 billion in 1992-93 to $3.82 billion in 1994-95 and then continued to decline and became negative to $61 million in 1998-99, but again rose to $3.03 billion in 1999-00 and then continued to decline and was only $0.98 billion in 2002-03. 

However, it shot up to a record level of $11.38 billion in 2003-04. The sharp fluctuations in portfolio investment have made it an undependable source of foreign funds which is related to the international financial climate. Total foreign investment has increased from $4.15 billion in 1993-94 to 8.15 billion in 2001- 02 and to $16.05 billion in 2003-04. Taking the 13-year period (1991-92 to 2003-04), out of a total foreign investment of $70.98 billion, foreign direct investment accounted for $35.35 billion (49.8 per cent) and portfolio investment was $35.63 billion (51.2 per cent). However, it may be mentioned that China has been able to attract a much higher level of foreign investment than India, though the situation has improved so far as India is concerned. For instance, as per World Investment Report (2004), FDI flows in China in 2003 was of the order of $53.5 billion while in the case of India, it was merely $4.37 billion.


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