Foreign Direct Investment (FDI) plays a really necessary role within the development of the nation. It isvery much vital in the case of underdeveloped and developing countries. A typical characteristic of thosedeveloping and underdeveloped economies is that the undeniable fact that these economies do nothave the required level of savings and financial gain so as to satisfy the specified level of investmentrequired to sustain the expansion of the economy. In such cases, foreign direct investment plays acrucial role of bridging the gap between the on the market resources or funds and therefore therequired resources or funds. It plays a crucial role within the long development of a country not solely asa supply of capital however conjointly for enhancing competitiveness of the domestic economy throughtransfer of technology, strengthening infrastructure, raising productivity and generating newemployment opportunities. In India, FDI is taken into account as a developmental tool, that helps inachieving autonomy in varied sectors and in overall development of the economy.The Government of India’s policy towards FDI was a close to “open door” policy during the 1950’s.
Itbecame restrictive and selective in the late 1960’s and 1970’s. The policy experienced gradual andpartial relaxation in the 1980’s and full-fledged liberalization since 1991 together with medium termadjustment and long term structural reforms introduced in India. The indoor government policy towardsFDI before economic reform may be classified under three different phases:1. The Phase of Cautious and Selective Attitude towards FDI (1948-1967)2. The Phase of Restrictive Attitude towards FDI (1968-1979)3. The Phase of Semi-Liberalization (1980-1990)During the 1950’s India pursued an open door FDI policy. It had been acknowledged that foreigninvestment was needed to be inspired on mutually beneficial terms for industrial development. Theofficial position on foreign investment was articulated by Jawaharlal Nehru, the first Prime Minister ofindependent India on April 6, 1949 once he recognized foreign capital as a crucial supplement todomestic savings for facilitating national economic and technological progress.
Foreign investors wereallowed full freedom of repatriation with the reassurance of compensation in the unforeseen event ofnationalization. In 1957-58, the Foreign Exchange crisis led to a further liberalization of thegovernment’s attitude towards FDI. The core objective of the foreign capital policy was that themanagement of industrial undertakings to stay within the Indian hands. However, the government hadgranted permission in some cases for allowing institution of exclusive foreign enterprises.Foreign capital was most well-liked in specific areas that needed new technology.
Governmentadditionally granted tax concessions to foreign enterprises and streamlined industrial licensingprocedures to accord early approvals for foreign collaborations. In the case of a hundred per cent(100%) export of output, foreigners were allowed to establish industrial units. To draw in additionalforeign investment into the country, India offered several incentives and concessions to foreigninvestors and created the Indian Investment Centre in 1961 to push foreign investment in India.The government policy on FDI turned restrictive since the late 1960’s. This was due to the advancewithin the technical capability of domestic trade on the one hand and the massive scale outflows ofinterchange from India as a result of remittances of dividends, profits, royalties and technical fees byforeign investors on the other hand. The government adopted an additional restrictive attitude towardsFDI within the 1970’s. The scope of foreign investment wasn't solely confined to industries requiringsophisticated technology, however was in the course of a deliberate attempt to divert FDI from Product,commodity, trade goods etc.
to capital and intermediate goods. Restricting FDI was a locality of effortsaiming to extend state control in varied sectors of the economy and was in line with promulgation ofrestrictive legislations like Monopolies and Restrictive Trade Practices (MRTP) Act (1969), the Patent Act(1970) and allied measures like nationalization of banks, insurance corporations and coal mines.The industrial licensing policy of 1970 confined the role of huge business houses and foreigncorporations to the core, heavy and export bound sectors. The main motive behind adoption ofrestrictive attitude towards FDI was the need to shield growing Indian industries from the threatobligatory by personal capital in India. Tt had been felt that the foreign subtle merchandise will posechallenge for upcoming Indian industries, not as excellent as their foreign counterpart. The restrictionskept on increasing with the introduction of MRTP Act in 1969 that brought all foreign corporationsbelow its management.In 1973, the new Foreign Exchange Regulation Act (FERA) came into force which required all foreignfirms operational in India, to register under Indian corporate legislation with up to forty percent (40%)equity. The industrial Policy Resolution (IPR) of 1973 restricted foreign participation to export-orientedindustries that were strategically necessary for long term growth prospects of the country.
The mainrestrictive controls were implemented through the foreign exchange Regulation Act (FERA) of 1973.FERA, 1973 consciously discriminated between domestic and foreign investors making it obligatory forbranches and subsidiaries of foreign companies to convert foreign equities to minority holdings. Therewere, however, some exceptions like preponderantly export-oriented firms, or those manufacturing