Recent Trends in FDI Flows and Prospects for India

Abstract

Conventional wisdom has it that foreign direct investment (FDI) flows to India have not been commensurate with her economic potential and performance. India has only very recently emerged as a destination for FDI since the pre-reform years were marked with a sharp antipathy toward foreign capital unless under certain conditions. With FDI becoming a significant component of investment only recently, accounting practices in India lagged behind international norms. Recently several problems of comparability have been noted. Towards rectifying some of these, the Government of India revised (starting November 2002) its computation of FDI figures in line with the best international practices and pursuant to the recommendations of a committee set up to examine this issue. This has led to a substantial improvement in FDI figures; however these are still well below China's. This paper, however, identifies the quality of FDI (as manifest in technological spillovers, export performance etc.) as more important than its quantity. Recent work has argued that high Chinese FDI might well be concealing difficulties. The paper argues that raising investment is more important than just raising the FDI component of such investment. It identifies measures to raise such FDI and improve its effectiveness.

Keywords: Foreign direct investment, investment policy

JEL Classification: F23, O16, R42