FDI Policy Before Liberalization

The foreign trade network, as also part of the internal trade that fed into exports, was controlled by the foreign capital. British companies dominated mining, jute industry, shipping, banking insurance, tea and coffee plantations. British corporations also controlled many Indian owned companies. The large presence of the foreign companies, particularly the British companies before independence, as explained earlier (in introduction part) did not contribute to the growth of income in the country. In fact it was one of the major causes of underdevelopment of the country as these companies were engaged in the production and export of the raw materials and food stuffs. There was practically no transfer of capital to India and India was a net exporter of capital to the U.K. There was no scope of transfer of technology as most of the investment was concentrated in low technology extractive industries.  Against this background, one can easily find the reason why after independence, an important plank of India‘s development policy was to discourage inflows of foreign capital. Share holding by the foreign companies was also reduced drastically by forced or voluntary transfer of capital into Indian hands. By the beginning of 80‘s the share of F.D.I in gross capital formation was the lowest for India among all developing countries. The tough and restrictive policy towards foreign equity investment continued without any significant change until 1991. But 1991 is a land mark year for Indian industry and commerce and in general for the whole Indian economy itself. It was 1991 when the rules governing foreign investment were liberalized greatly and it continues till date. And hence, India is once again actively seeking foreign investment. In fact, distinct changes have been observed in thrust and direction of F.D.I policy of the Government. These changes are the result of the development in industrial policies and also foreign exchange situation, from time to time. For the convenience of the study and seeing the thrust and direction of the policies regarding the F.D.I., it would be good if we divide the whole period into different time span and analyze the whole period related to F.D.I.