CHAPTER V FOREIGN INVESTMENT AND EXTERNAL COMMERCIAL BORROWING

CHAPTER V FOREIGN INVESTMENT AND EXTERNAL COMMERCIAL BORROWING Chapter V is conveniently divided into four sections. Section A deals with foreign investment. Foreign investment comprises of two components namely foreign direct investment and foreign portfolio investment, these components are discussed in Sections B and C in detail. Section D is devoted to discuss about external commercial borrowing. SECTION A Foreign Investment Foreign investment is considered to be the major source of fund which may contribute to the growth of the developing countries. In recent years it has become obvious that more and more share market punters are open to investment in India. The priority sectors in India such as banking, insurance, e commerce, telecom etc. are believed to be the drivers of foreign investment in India. Foreign investment plays an important role in the long-term economic development of a country by augmenting availability of capital, enhancing competitiveness of the domestic economy through transfer of technology, strengthening infrastructure, raising productivity, 150

generating new employment opportunities and boosting exports. Foreign investment, therefore, is a strategic instrument of development policy of a country. In the wake of economic liberalisation policy initiated in 1991, the Government of India has taken several measures to encourage foreign investment, both direct and portfolio. India has consistently been considered as one of the most attractive investment destinations by reputed international rating organisations. With a vast reservoir of skilled and cost-effective manpower, India offers immense opportunities for Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO) and Engineering Process Outsourcing (EPO). The legal, economic and financial reforms undertaken by the Indian Government since the early 1990 s have resulted in substantial and rapid growth of the Indian economy and led to the integration of India into the global economy. 1 Table 5.1. The total inflow of foreign investment into India is presented in 151

Table 5.1 Inflow of Foreign Investment into India (US $ million) Year Foreign Investment % increase/decrease 1990-91 103 1991-92 133 29.12 1992-93 559 320.30 1993-94 4153 642.93 1994-95 5138 23.72 1995-96 4892-4.79 1996-97 6133 25.37 1997-98 5385-12.20 1998-99 2401-55.41 1999-00 5181 115.78 2000-01 6789 31.04 2001-02 8151 20.06 2002-03 6014-26.22 2003-04 15699 161.04 2004-05 15366-2.12 2005-06 21453 39.61 2006-07 29829 39.04 2007-08 61633 106.62 2008-09 21313-65.42 Compound Growth Rate 32.01 Source: RBI Bulletin December 2000 RBI Bulletin April 2010 152

The perusal of Table 5.1 shows that the total foreign investment into India has risen from US $ 103 million in 1990-91 to US $ 21,313 million in 2007-08. There has been a gradual increase in foreign investment from 1990-91 to 2007-08. Only during six years there was decline in foreign investment. In 2008-09 there is a sudden decline in foreign investment in India. This might be due to financial crisis in different foreign countries in the specified years (six years). It is interesting to note that, during 2007-08 the foreign investment is found to be the highest (US $ 61,633 million) due to the liberelisation of foreign investment policy by the Indian Government. It is worth noting that, during the last year of the reference the total foreign investment (US $ 21,313 million) is approximately three times lesser than the total foreign investment (US $ 61,633 million) in the year 2007-08 due to the falling share of major investor countries, steep fall of approval by 55.7 per cent and slackening of fresh equity. The compound growth rate worked out for foreign investment for the study period is 32.01. It is inferred that the total inflow of foreign investment into India increases gradually except for few years. 153

SECTION B Foreign Direct Investment Foreign direct investment in India is growing rapidly. Foreign direct investment is an integral part of an open and effective international economic system and a major catalyst to development. Foreign direct investment is highly beneficial for a country like India. Foreign direct investment triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps in creating a more competitive business environment and enhances enterprise development. All these factors contribute to higher economic growth and consequently aid in alleviating poverty. Apart from bestowing economic benefits FDI may also help improve environmental and social conditions by transferring "cleaner" technologies and leading to more socially responsible corporate policies. These benefits accompanied by the fact that fast-growing countries attract a lot of foreign investment indicate a positive correlation between foreign direct investment and growth. In India foreign direct investment played a limited role before 1991. The actual foreign direct investment inflow is recorded under seven heads: they are Government (SIA\FIPB), Reserve Bank of 154

India, acquisition of share route, Non-Resident Indian (NRI) schemes, equity capital of unincorporated bodies, reinvested earnings and other capital. 2 Foreign Direct Investment Inflow into India through Government (SIA\FIPB) FDI in activities not covered under the automatic route requires prior government approval and are considered by the Foreign Investment Promotion Board (FIPB), a government body that offers single window clearance for proposals on foreign investment in the country that are not allowed access through the automatic route. Plain paper applications carrying all relevant details are also accepted. No fee is payable. Foreign Direct Investment Inflow into India through RBI Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs. The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals. Foreign equity up to 24 per cent, 50 per cent, 51 per cent, 155

74 per cent and 100 per cent is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. Foreign Direct Investment Inflow into India through NRI With the progressive liberalisation of foreign direct investment policy, foreign direct investments including NRI investments up to 100 per cent (subject to sectoral equity caps/statutory ceilings) with repatriation benefits can be made without any prior approval except in some cases. Foreign Direct Investment Inflow into India through Acquisition of Shares Foreign investing company which is interested in investing in India entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it should get the approval of the Security Exchange Board of India (SEBI). 156

Foreign Direct Investment Inflow into India through Equity Capital of Unincorporated Bodies Equity capital is the money invested which is, in contrast to debt capital, is not repaid to the investors in the normal course of business. It represents the risk capital staked by the owners through purchase of the firm's common stock (ordinary shares). Its value is computed by estimating the current market value of everything owned by the firm from which the total of all liabilities is subtracted. On the balance sheet of the firm, equity capital is listed as stockholders' equity or owners' equity, also called equity financing or share capital. Foreign Direct Investment Inflow into India through Reinvested Earnings Foreign direct investment into India through reinvested earnings includes reinvested earnings of incorporated entities, reinvested earnings of unincorporated entities and reinvested earnings of indirectly held direct investment enterprises. Foreign Direct Investment Inflow into India through Other Capital Foreign direct investment through other capital includes shortterm and long-term inter-corporate borrowings, trade credit, supplier s credit, financial leasing, financial derivatives, debt securities and land and buildings. 157

The foreign direct investment inflow into India during the reference period is presented in Table 5.2 Table 5.2 Inflow of Foreign Direct Investment into India (US $ million) Year Government (SIA/FIPB) (a) RBI (b) NRI (c) Acquisition of Shares (d) Equity capital of unincorporated bodies (e) Reinvested Earnings (f) Other capital (g) Foreign Direct Investment (a+b+c+d+e+f+g) 1990-91 97 97 1991-92 66 63 129 1992-93 222 42 51 315 1993-94 280 89 217 586 1994-95 701 171 442 1314 1995-96 1,249 169 715 11 2144 1996-97 1,922 135 639 125 2821 1997-98 2,754 202 241 360 3557 1998-99 1,821 179 62 400 2462 1999-00 1,410 171 84 490 2155 2000-01 1,456 454 67 362 61 1350 279 4029 2001-02 2,221 767 35 881 191 1645 390 6130 2002-03 919 739 916 190 1833 438 5035 2003-04 928 534 735 32 1460 633 4322 2004-05 1,062 1,258 930 528 1904 369 6051 2005-06 1,126 2,233 2,181 435 2760 226 8961 2006-07 2,156 7,151 6,278 896 5828 517 22826 2007-08 2,298 17,127 5,148 2,291 7679 292 34362 2008-09 4,699 17,998 4,632 666 6428 757 35168 Source : RBI Bulletin December 2000 RBI Bulletin April 2010 Compound Growth Rate 36.21 158

It is clear from Table 5.2 that the total inflow of foreign direct investment into India increased from US $ 97 million to US $ 35,168 million during the reference period. The foreign direct investment has gradually increased from 1990-91 to 2008-09 except for four years. It is interesting to note that, during the year 2006-07, the total foreign direct investment inflow into India (US $ 22,826 million) was approximately three times higher than the total foreign direct investment inflow (US $ 8961 million) in the previous year. This is due to the liberalisation of FDI policy in India. During the year 2007-08 and 2008-09 the foreign direct investment is found to be the highest, due to the fact that the Indian Government has changed the approval route into the automatic route for a stumble-free as well as higher amount of foreign direct investment inflow into India. The inflow of foreign direct investment into India through Government was allowed since 1990-91 and it increased from US $ 97 million to US $ 4699 million during the end of the reference period. Except for three years, the foreign direct investment inflow into India through government is found increasing gradually during study period. In the last year of the reference the total flow of foreign direct investment through Government is US $ 4,699 million and this is approximately seventy times higher than the inflow during the year 1990-91 (US $ 97 million). This is due to the fact that procedures 159

regarding the government approval were simplified. Even the plain paper application containing the relevant information was accepted and also the fees payment is cancelled. The inflow of foreign direct investment into India through RBI was allowed since 1992-93. It is worth noting that the contribution of RBI to the total inflow of foreign direct investment is more due to the fact that the RBI permits foreign equity up to 100 per cent depending on the category of industries. During the last year of the reference, the foreign direct investment inflow through RBI is US $ 17,998 million because the industries engaged in exporting were given automatic approval by the RBI. The foreign direct investment inflow into India through NRI investments was allowed from 1991-92 to 2001-02. The foreign direct investment inflow through NRI investments gradually decreased from 1991-92 to 2001-02 except for three years. It is interesting to note that during the year 1995-96 (US $ 715 million) NRI investment is found to be the highest due to the liberalisation of FDI policy and the then Finance Minister specially invited the NRIs to invest more in the home country. The decrease in the inflow of foreign direct investment through NRI from 1996-97 (US $ 639 million) to 2001-02 (US $ 35 million) is due to the changes introduced by government. Indian 160

Government has announced that foreign direct investment including NRI investment with repatriation benefits can be made only with prior approval. The foreign direct investment inflow into India through acquisition of shares was allowed since 1995-96 and there was a gradual increase in it from 1995-96 to 2008-09 except during four years. The contribution of shares is more to the total inflow of foreign direct investment due to the reason that the foreign investing company can acquire shares of an Indian company without obtaining any prior permission of the Foreign Investment Promotion Board (FIPB). The foreign direct investment inflow through equity capital of unincorporated bodies was allowed since 2000-01. The foreign direct investment through share capital has gradually increased from 2000-01 to 2008-09 except for three years. It is quite interesting to note that during the last year of the reference, the inflow of foreign direct investment through equity financing (US $ 666 million) is approximately three times lesser than the equity flow in 2007-08 (US $ 2,291 million) due to the financial crisis occurred in USA. The foreign direct investment inflow into India through reinvested earnings was allowed since 2000-01. From US $ 1,350 161

million in 2000-01 it has increased to US $ 6,428 million in 2008-09. The contribution of reinvested earnings to the inflow of foreign direct investment into India was more due to the liberalisation of FDI policy. It is worth noting from Table 5.2 that the foreign direct investment inflow into India through other capital was allowed since 2000-01. The other capital includes many components and it shows a gradual increase from 2000-01 to 2008-09 due to the liberalisation of FDI policy. The compound growth rate of foreign direct investment worked out is 36.21, implying considerable growth in the inflow of foreign direct investment into India. It is inferred that, of the seven components of foreign direct investment inflow into India, the first two components [Government (SIA/FIPB) and RBI] are found to be important. However, in the second half of the reference period (2000-01 to 2008-09), the four components such as acquisition of shares, equity capital of unincorporated bodies, reinvested earnings and other capital contributed significantly to the inflow of foreign direct investment into India. Unfortunately for the last seven years there was no inflow of foreign direct investment into India through NRI investments. 162

SECTION C Foreign Portfolio Investment Foreign Portfolio Investment refers to equity participation by Non- Resident Indians in joint stock companies of our country. It also signifies the investment by foreigners in the debentures issued by joint stock companies of the recipient country. The investment made by Foreign Institutional Investors and Euro equities issued by Indian companies through Global Depositary Receipts (GDRs), American Depositary Receipts (ADRs) and Foreign Currency Convertible Bond (FCCB) also constitute portfolio investments. 3 The globalisation of the World Economy during 1990s resulted in a substantial increase in portfolio flows from industrialised countries to emerging market economies. The actual foreign portfolio investment inflow is recorded under three heads: they are GDRs/ADRs, FIIs and Offshore Funds and others. Foreign Portfolio Investment Inflow into India through GDRs\ADRs Any foreigner may purchase GDRs\ADRs, whereas shares in India can be purchased on Indian Stock Exchanges only by Non- Resident Indians, persons of Indian origin or foreign institutional 163

investors. There are no end-use restrictions on GDRs\ADRs issue proceeds, except for an express ban on investment in real estate and stock markets. Foreign Portfolio Investment Inflow into India through FIIs Portfolio investment from Foreign Institutional Investors (FIIs) has been in operation since 1992. FIIs including mutual funds, investment trusts, asset management companies, nominee companies and institutional portfolio managers or their power attorney holders can invest in all the shares, debentures and warrants issued by listed companies on the primary and secondary markets. Foreign Portfolio Investment Inflow into India through Offshore Funds and Others Offshore investment is a wide range of investment strategies that capitalise on advantages offered outside an investor s home country. In India the foreign portfolio investment flows through offshore funds also. Total inflow of foreign portfolio investment into India is presented in Table 5.3. 164

Year Table 5.3 Inflow of Foreign Portfolio Investment into India (US $ million) GDRs\ADRs (a) FIIs (b) Offshore Funds & Others (c) Foreign Portfolio Investment (a+b+c) 1990-91 6 6 1991-92 4 4 1992-93 240 1 3 244 1993-94 1,520 1,665 382 3567 1994-95 2,082 1,503 239 3824 1995-96 683 2,009 56 2748 1996-97 1,366 1,926 20 3312 1997-98 645 97 204 1828 1998-99 270-390 59-61 1999-00 768 2,135 123 3026 2000-01 831 1,847 82 2760 2001-02 477 1,505 39 2021 2002-03 600 377 2 979 2003-04 459 10,918 11377 2004-05 613 8,686 16 9315 2005-06 2,552 9,926 14 12492 2006-07 3,776 3,225 2 7003 2007-08 6,645 20,328 298 27271 2008-09 1,162 15,017-13855 Compound Growth Rate 55.06 Source : RBI Bulletin April 2010 RBI Bulletin December 2000 Negative (-) sign indicates outflow 165

The perusal of Table 5.3 shows the total inflow of foreign portfolio investment into India during the reference period. It is interesting to note that during the years 1998-99 and 2008-09 there is only outflow of foreign portfolio investment from India and no inflow into India. During 2007-08 the inflow of foreign portfolio investment is found to be the highest (US $ 27,271 million) due to the liberalisation of foreign investment policy of the Indian Government. It is worth noting that due to the financial crisis in other countries there is only outflow of foreign portfolio investment from India during the last year of reference. The inflow of foreign portfolio investment through GDRs/ADRs was allowed since 1992-93. Foreign portfolio investment inflow through GDRs\ADRs is found to be increasing in all the years except for six years. The foreign portfolio investment inflow through GDRs\ADRs was highest during 2007-08 (US $ 6645 million) due to the fact that the end-use restrictions on GDR\ADR issue proceeds were liberalised by the Indian Government. Acute financial crisis arose in advanced countries especially in US in the second half of 2007-08 and this led to a sudden decrease in the inflow of foreign portfolio investment during the last year of reference. During this year, in fact there was outflow of funds only. 166

The inflow of foreign portfolio investment through foreign institutional investors were allowed since 1992-93. Since then, foreign investors have been finding Indian securities market well priced and have been preferring to put in money even as long-term overseas fund. This active participation of foreign investors led to inflow of foreign institutional investments into India. It is interesting to note that during 1998-99 and 2008-09 there is only outflow of foreign portfolio investment through foreign institutional investments. This might be due to the fact that the foreign institutional investors made no investments in shares, debentures and warrants issued by the listed companies on the primary and secondary markets, during these two years. The foreign portfolio investment inflow into India through offshore funds and others was in operation since 1990-91. During 2003-04 and 2008-09, there is no inflow of foreign portfolio investment into India through offshore funds and others. The compound growth rate worked out for foreign portfolio investment is 55.06. It is inferred that, of the three components, foreign institutional investment dominate in determining the total inflow of foreign portfolio investment in India over the reference period. 167

Estimating the Reliability of Foreign Direct Investment and Foreign Portfolio Investment To establish the reliability of foreign direct investment and foreign portfolio investment, coefficient of variation is calculated. The contribution of foreign direct investment and foreign portfolio investment to foreign investment in India for the period under consideration is presented in Table 5.4. Table 5.4 Components of Foreign Investment Year Foreign Direct Foreign Portfolio Investment Investment 1990-91 97 6 1991-92 129 4 1992-93 315 244 1993-94 586 3567 1994-95 1314 3824 1995-96 2144 2748 1996-97 2821 3312 1997-98 3557 1828 1998-99 2462-61 1999-00 2155 3026 2000-01 4029 2760 2001-02 6130 2021 2002-03 5035 979 2003-04 4322 11377 2004-05 6051 9315 2005-06 8961 12492 2006-07 22826 7003 2007-08 34362 27271 2008-09 35168-13855 Note : The values of foreign direct investment and foreign portfolio investment for the reference period are extracted from table 5.2 and table 5.3 168

From Table 5.4, the Coefficient of Variation is separately calculated for each component of foreign investment i.e. foreign direct investment and foreign portfolio investment. The values of C.Vs are: C.V 1 = 144.85 C.V 2 = 191.54 Where, C.V 1 is the coefficient of variation of foreign direct investment and C.V 2 is the coefficient of variation of foreign portfolio investment. From the above values it is inferred that foreign direct investment is found to be more reliable than the foreign portfolio investment in contributing to the foreign investment in India. The components of foreign investment is shown in Figure 5.1 169

Figure 5.1 Components of Foreign Investment 40000 35000 30000 25000 20000 15000 10000 5000 0 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Years Foreign Direct Investment Foreign Portfolio Investment 170

SECTION D External Commercial Borrowing of India External Commercial Borrowing is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (Public Sector Undertakings). ECBs include commercial bank loans, Securitised Borrowings (IDBS and FCCBS), commercial borrowings from the private sector window of multilateral financial institutions such as IMF, IBRD, International Finance Corporation, ADB, AFIC, CDC, self liquidating loans, etc. ECBs cannot be used for investment in stock market or speculation in real estate. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies. For infrastructure and Greenfield projects, funding up to 50 per cent through ECB is allowed. In telecom sector too, up to 50 per cent funding through ECB is allowed. External commercial borrowing is a key component of India s overall external debt. It is being permitted by the government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as power, oil exploration, telecom, railways, roads & bridges, ports, industrial parks and urban infrastructure and the export sector. 171

Development Financial Institutions, through their sub-lending against the ECB approvals are also expected to give priority to the needs of medium and small scale units. Proceeds should be utilised at the earliest and corporate should comply with RBI's guidelines on parking external commercial borrowings outside till actual imports. 4 India s Commercial Borrowing by Commercial Bank Loans Commercial bank loans is a mode of raising external commercial borrowing in the form of term loans from banks outside India. India s Commercial Borrowing by Securitised Borrowings (including IDBS and FCCBS) Through Indian Development Bonds (IDBs) and Foreign Currency Convertible Bonds (FCCBs) securiritised borrowings comes. It forms an important part of India s commercial borrowing. These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. India s Commercial Borrowing by Loans/Securitized Borrowings, etc. with Multilateral/Bilateral Guarantee and IFC India raised its external borrowing by way of Loans/Securitised borrowings, etc. with multilateral/bilateral guarantee. 172

India s Commercial Borrowing by Self Liquidating Loans Self-liquidating loan is used to pay for a temporary increase in accounts receivable or inventory. As soon as cash is realised from the assets, the loan is repaid. The borrowed money is used to acquire resources that are combined for later sale, and the proceeds from them are used to repay the loan. in Table 5.5. The total external commercial borrowing of India is presented 173

Year Table 5.5 External Commercial Borrowing of India (US $ million) Commercial bank loans (a) Securitised borrowings (b) Loans/Securitised borrowings, etc. with multilateral/bilateral guarantee and IFC (c) Self liquidating loans (d) External Commercial Borrowing (a+b+c+d) 1990-91 6831(66.91) 3022(29.60) 356(3.49) 10209(100) 1991-92 6704(57.23) 4512(38.51) 484(4.13) 15(0.13) 11715(100) 1992-93 6453(55.42) 4479(38.47) 674(5.79) 37(0.32) 11643(100) 1993-94 5959(48.20) 5278(42.69) 775(6.27) 351(2.84) 12363(100) 1994-95 5837(44.93) 5377(41.39) 952(7.33) 825(6.35) 12991(100) 1995-96 6731(48.52) 5751(41.45) 888(6.40) 503(3.63) 13873(100) 1996-97 8349(58.24) 4825(33.66) 981(6.84) 180(1.26) 14335(100) 1997-98 9981(58.76) 6022(35.45) 874(5.15) 109(0.64) 16986(100) 1998-99 10343(49.30) 9772(46.58) 808(3.85) 55(0.26) 20978(100) 1999-00 10094(50.61) 9073(45.49) 750(3.76) 26(0.13) 19943(100) 2000-01 9899(40.56) 13887(56.90) 622(2.55) 24408(100) 2001-02 9962(42.72) 12851(55.11) 507(2.17) 23320(100) 2002-03 9870(43.92) 12093(53.81) 509(2.27) 22472(100) 2003-04 11588(52.66) 9568(43.48) 851(3.87) 22007(100) 2004-05 14375(54.44) 11197(42.40) 833(3.15) 26405(100) 2005-06 16479(62.30) 9217(34.84) 756(2.86) 26452(100) 2006-07 24577(59.30) 15603(37.65) 1263(3.05) 41443(100) 2007-08 40226(64.53) 20602(33.05) 1509(2.42) 62337(100) 2008-09 43310(69.10) 17981(28.69) 1385(2.21) 62676(100) Compound Growth Rate 10.13 Source : Hand book of statistics on Indian economy September 15, 2009. (Figures in parenthesis indicates percentage to total) 174

The perusal of Table 5.5 shows that the total external commercial borrowing of India varies from US $ 10209 million to US $ 62676 million during the reference period. The external commercial borrowing show a gradual increase from 1990-91 to 2008-09 except for six years. Of the three components, the first three components namely commercial bank loan, securitised borrowings, loans/securitised borrowings, etc. with multilateral/bilateral guarantee and IFC contribute themselves to the total external commercial borrowing of India in all the years under study. Of these three component, the first component (commercial bank loans) contributes higher amount to the external commercial borrowing for 16 years due to the fact that, the rate of interest of the foreign commercial banks was less. For the remaining three years (2000-01 to 2002-03) its contribution was found lesser than the contribution of securitised borrowings. Next to commercial bank loans, securitised borrowings considerably contribute to the external commercial borrowing of India, followed by the third (Loans/Securitised borrowings, etc. with multilateral/bilateral guarantee and IFC) and the fourth component (Self liquidating loans) until 1999-2000. No self liquidating loan was borrowed from 2000-01 to 2008-09. 175

The contribution of securitised borrowing outnumbers the commercial bank loan for three years from 2000-01 to 2002-03. This might be due to the fact that a good number of Indian Development Bank Bonds and Foreign Currency Convertible Bonds have been handed to foreign countries as securities. The third component (Loans/Securitised borrowings, etc. with multilateral/bilateral guarantee and IFC) bears less contribution to external commercial borrowings due to the hesitation of Indian Government to give multilateral and bilateral guarantee to the foreign countries. The contribution of the fourth component (Self liquidating loans) for first 10 years except in the first year is found to be less than all the other components. The compound growth rate worked out for external commercial borrowing of India is 10.13. It is inferred that the commercial bank loan is dominant in contributing to the total amount of external commercial borrowing of India during the study period. Comparison of Compound Growth Rate of Different Components Compound growth rate of foreign investment, foreign direct investment, foreign portfolio investment and external commercial borrowing is given in Table 5.6. 176

Table 5.6 Compound Growth Rate of Different Components Components Compound Growth Rate Foreign Investment 32.01 Foreign Direct Investment 36.21 Foreign Portfolio Investment 55.06 External Commercial Borrowings 10.13 Note : The values of compound growth rate for the reference period are extracted from table 5.1, table 5.2, table 5.3 and table 5.5. On comparing the compound growth rate of foreign investment, foreign direct investment, foreign portfolio investment and external commercial borrowing, it is found that the compound growth rate of foreign portfolio investment is higher than the other three over the reference period. In the initial period the foreign portfolio investment was just negligible. From being just US $ 6 million in 1990-91 it has increased to US $ 27271 million in 2007-08. So the compound growth rate during the reference period worked out to be 55.06. In conclusion it could not be ascertained that a component which has higher growth rate is significant in contributing foreign capital inflow into India. Compound growth rate of different components of foreign capital inflow of India is presented in Figure 5.2 for better understanding. 177

Figure 5.2 Compound Growth Rate of Different Components 35 30 25 20 15 10 5 0 Foreign Investment Foreign Direct Investment Foreign Portfolio Investment External Commercial Borrowings 178

REFERENCES 1. Bhasin Niti, Foreign Investment in India, New Century Publication, New Delhi, p. 3 2. Jongsoo Park, Korean Perspective on FDI in India, Economic and Political Weekly, Vol. XXXIX, No. 31 p. 3551 3. Dewett.K.K, Varma.J.D, Sharma.M.L, Indian Economics, S. Chand & Co. Ltd, New Delhi, 2002. p.565 4. External Commercial Borrowing (ECB), Reserve Bank of India Circular, January 31, 2004. p.1216. OF INDIA CIRCULAR 179