150

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,

151

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

The total inflow of foreign investment into India is presented in

Table 5.1.

152

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

153

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.

154

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

155

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,

156

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).

157

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 short-

term and long-term inter-corporate borrowings, trade credit, supplier’s

credit, financial leasing, financial derivatives, debt securities and land

and buildings.

158

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)

Yea

r

Go

ve

rnm

en

t (S

IA/F

IPB

) (a

)

RB

I (b

)

NR

I (c

)

Acq

uis

itio

n o

f S

hare

s (

d)

Eq

uit

y c

ap

ital o

f u

nin

co

rpo

rate

d

bo

die

s (

e)

Rein

ve

ste

d

Earn

ing

s (

f)

Oth

er

ca

pit

al

(g)

Fo

reig

n D

irec

t In

ve

stm

en

t (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

Compound Growth Rate 36.21

Source : RBI Bulletin December 2000 RBI Bulletin April 2010

159

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

160

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

161

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

162

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.

163

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

164

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.

165

Table 5.3 Inflow of Foreign Portfolio Investment into India

(US $ million)

Year 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

166

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.

167

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.

168

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

Investment Foreign Portfolio

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

169

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.V1 = 144.85

C.V2 = 191.54

Where, C.V1 is the coefficient of variation of foreign direct

investment and C.V2 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

170

Figure 5.1 Components of Foreign Investment

0

5000

10000

15000

20000

25000

30000

35000

40000

1990-9

1

1991-9

2

1992-9

3

1993-9

4

1994-9

5

1995-9

6

1996-9

7

1997-9

8

1998-9

9

1999-0

0

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

Years

Foreign Direct Investment Foreign Portfolio Investment

171

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.

172

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.

173

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.

The total external commercial borrowing of India is presented

in Table 5.5.

174

Table 5.5

External Commercial Borrowing of India (US $ million)

Year 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)

175

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.

176

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.

177

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.

178

Figure 5.2

Compound Growth Rate of Different Components

0

5

10

15

20

25

30

35

Foreign

Investment

Foreign Direct

Investment

Foreign

Portfol io

Investment

External

Commercial

Borrowings

179

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