Foreign capital is very important for a developing country like India, however there are various concerns associated with it. Discuss.

Foreign Capital refers to sources of capital and investment, which have their origin outside India.

Various sources of foreign capital:

  • Foreign direct investment.
  • Foreign institutional investment.
  • Loans and grants from multilateral institutions.
  • Foreign bank deposits in the Indian financial system.

Foreign capital not only brings Forex but also brings investment, employment, skills, technology, and innovation along with it. In a developing country like India, which needs huge finances for its domestic growth and development, foreign capital is inevitable.

Importance of foreign capital for India:

  • Foreign capital is a kind of non-debt financing, wherein foreign capital investment in infrastructure, development projects, etc does not create a burden on the Indian exchequer.
  • India needs forex for its huge import dependence.
  • Foreign investment brings in employment and skills.
  • It helps to expand the domestic manufacturing base, hence, contributes to GDP growth.
  • The rising fiscal deficit also makes foreign capital necessary for domestic growth. It helps prevent crowding-out for the private sector.
  • It helps to reduce the current account deficit.
  • Improves domestic competition and thus compels government and industry to bring in reforms for ease of doing business.

UNCTAD in its world investment report ranked India as the 9th most favorable country for foreign investment. While during covid-19 word investment got reduced by 40%, FDI in India, increased by 16%. Today India ranks 4th in terms of forex reserves.

Concerns with heavy dependence on foreign capital:

  • FIIs are also sometimes known as helicopter money, as they can easily come and easily go.
  • FDI uses the local resources and drives out profit to outside India.
  • Can lead to inflation, if not regulated.
  • Global black money can circle through this means via India.

With increasing avenues for foreign capital attraction in India, the government must simultaneously focus on increasing domestic capability for manufacturing to reap overall benefits.


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