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India: Attracting confidence

May 15, 2003

The opening of the Indian economy in 1990-91 brought a drastic shift in the perception of the international investor community towards our country. A significant amount of capital started flowing into the country, which kept pushing up India's foreign exchange (forex) reserves to newer highs. Foreign Direct Investment (FDI) is a part of the inflow. Yearly FDI inflows went up from a paltry US$ 97 m in FY91 to over US$ 4,000 m in FY03 as per the provisional figures issued by the Reserve Bank of India (RBI) for FY03.

This is a healthy inflow of investments considering the turmoil the Indian economy has gone through in the recent years. Whether it was the Gujarat riots or the Indo-Pak standoff or poor monsoons resulting in economic slowdown, the pouring of FDI into the country reaffirms the belief of the international community towards India's growth prospects going forward. Undoubtedly, the government's divestment programme has also played some role in attracting FDI into the country.

Moreover, the cause for the huge inflows in the form of FDI could be due to the fact that the government has been at the forefront of development. It has started taking steps by pushing for growth in infrastructure (roads, railway and ports) and housing sectors. Also, with the budget focusing on health, education and employment, this could provide a further fillip to development. The government is also trying to speed up the reforms process in sectors like power and banking.

India's share rests at about 5% of the total FDI flows into developing countries. The recent inflows could be due to the uncertainty prevailing in major world economies. Attraction towards India lies in the fact that while developed countries are likely to grow in the range of 2%-3%, India is projected to grow at almost twice the rate. Another heartening fact is that, a few years back only 20%-25% of FDI approvals translated into actual investment, this percentage has gone up to over 70% in FY02. This is a good indicator of investor confidence in the policies, reforms and growth of our country.

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