Foreign Direct Investment and Indian Economy

Foreign capital played an important role in the early stages of industrialization of most of the advanced countries of today, like the countries of Europe (including the Russia) and North America. Though the problems of development of developing countries of today are not very much similar to those faced by the advanced countries in the past, there is a general view that foreign capital, if properly directed and utilized, can assist the development of the developing countries. Economic growth is a function of, among other things, capital formation. In the developing countries, the per capita income and savings rate being very low, domestic capital formation is inadequate to give a 'big push' to the economy to take it to the 'take-off stage. Hence the domestic resources may be supplemented with foreign capital to achieve the critical minimum investment to break the vicious circle of "low-income-low savings-low investment-low income."Another way by which foreign capital helps accelerate the pace of economic growth is by facilitating essential imports required for carrying out development programmes, like capital goods, know-how, raw materials and other inputs and even consumer goods. The machinery, the know-how, and other inputs needed may not be indigenously available; further, the demand spurt created by large-scale investments may necessitate import of consumer goods. Capital is stated as the engine of economic growth. This statement has gained more importance in the recent times.