Major sources of foreign capital for India include foreign direct investment, external commercial borrowings, and foreign institutional investments. Foreign capital is necessary for India to sustain high investment levels, develop infrastructure, and address financing gaps. While India welcomes foreign capital, some business constraints like bureaucracy, taxation complexity, and corruption can dampen investment enthusiasm. The government is taking steps to liberalize rules and ease business conditions to attract more foreign participation in India's growth.

1. FOREIGN CAPITAL
Major Sources are
• Foreign Direct Investment (FDI)
• Direct Investment by Residents in Joint Venture/wholly owned subsidiaries
• External Commercial Borrowings (ECB)
• Euro Issues (FCCB/GDR/ADR)
• Foreign Currency Exchangable Bonds
• Foreign Institutional Investor Investment (FIIIs)
• Off-shore funds
• Overseas Venture Capital Investments
Capital is a type of good that can be consumed now, but if consumption is deferred
an increased supply of consumable goods will be available later. Adam Smith
defines capital as "That part of a man's stock which he expects to afford him
revenue is called his capital." Capital is derived from the Latin word "caput"
meaning head, as in "head of cattle".[1]
The term "stock" is derived from the Old
English word for stump or tree trunk, i.e. something that grows over time.[2]
It has
been used to refer to all the moveable property of a farm since at least 1510.[3]
In
Middle Ages France contract leases and loans bearing interest specified payment in
heads of cattle.[4]
In economics, capital goods, real capital, or capital assets are already-produced
durable goods or any non-financial asset that is used in production of goods or
services.
How a capital good is maintained or returned to its pre-production state varies with
the type of capital involved. In most cases capital is replaced after a depreciation
period as newer forms of capital make continued use of current capital non
profitable.
Capital is distinct from land (or non-renewable resources) in that capital can be
increased by human labor. At any given moment in time, total physical capital may
be referred to as the capital stock (which is not to be confused with the capital
stock of a business entity.)
In a fundamental sense, capital consists of any produced thing that can enhance a
person's power to perform economically useful work—a stone or an arrow is
capital for a caveman who can use it as a hunting instrument, and roads are capital

2. for inhabitants of a city. Capital is an input in the production function. Homes and
personal autos are not usually defined as capital but as durable goods because they
are not used in a production of saleable goods and services.
In classical economic schools of thought[citation needed]
, particularly in Marxist
political economy,[5]
capital is money used to buy something only in order to sell it
again to realize a financial profit. For Marx capital only exists within the process of
economic exchange—it is wealth that grows out of the process of circulation itself,
and for Marx it formed the basis of the economic system of capitalism. In more
contemporary schools of economics, this form of capital is generally referred to as
"financial capital" and is distinguished from "capital goods".
Modern types of capital
Detailed classifications of capital that have been used in various theoretical or
applied uses generally respect the following division:
 Financial capital, which represents obligations, and is liquidated as money
for trade, and owned by legal entities. It is in the form of capital assets,
traded in financial markets. Its market value is not based on the historical
accumulation of money invested but on the perception by the market of its
expected revenues and of the risk entailed.
 Natural capital, which is inherent in ecologies and which increases the
supply of human wealth, e.g. trees.
 Social capital, which in private enterprise is partly captured as goodwill or
brand value, but is a more general concept of inter-relationships between
human beings having money-like value that motivates actions in a similar
fashion to paid compensation.
 Instructional capital, defined originally in academia as that aspect of
teaching and knowledge transfer that is not inherent in individuals or social
relationships but transferrable. Various theories use names like knowledge or
intellectual capital to describe similar concepts but these are not strictly
defined as in the academic definition and have no widely agreed accounting
treatment.
 Human capital, a broad term that generally includes social, instructional and
individual human talent in combination. It is used in technical economics to
define balanced growth which is the goal of improving human capital as
much as economic capital. A far less common term, spiritual capital, refers

3. to the power, influence and dispositions created by a person or an
organization’s spiritual belief, knowledge and practice, which is also an
aspect of human capital that may not be easily captured as a component
social, instructional or individual element.
Need for Foreign Capital
 Sustaining a high level of investment
 The technological gap
 Exploitation of natural resources
 Undertaking the initial risk
 Development of basic economic infrastructure
 The foreign exchange gap
Foreign aid
 Includes “all official grants and concessional loans, which are broadly aimed
at transferring resources from developed to less developed nations on
developmental or income distributional grounds.
 Lower r
 Longer maturity period
 Foreign Governments, IMF, World Bank etc.
India’ policy towards Foreign Capital
 No discrimination between foreign and domestic capital
 Full opportunities to earn profits
Reasons for sharp increase in FDI
 Among the developing countries, India has now emerged as the second most
preferred destination for FDI
 India’s share (2.3% in 05 to 4.5% in 06)
 Expansion in domestic activity
 Positive investment climate
 Progressive liberalisation of the FDI policy
 Simplification of procedures
 Growth in financial services, information technology etc.
Sectoral Composition

4.  Largest recipient- Electronic equipment and computer software (17.54% =
one – sixth)
 Followed by services sector (12.69%)
 Telecommunication (10.39%)
 Transportation (9.31%)
 Power and oil refinery (7.45%)
 Chemicals (5.79%)
 Food processing industry (3.12%)
 Drugs and pharmaceuticals (2.19%)
 Metallurgical industries (2.14%)
Determinants of FDI inflows:
◦ market size (income levels and population)
◦ extent of urbanization
◦ quality of infrastructure
◦ policy factors such as
◦ tax rates,
◦ investment incentives,
◦ performance requirements.
India as a destination for F.D.I.
 Investors are generally upbeat about the country, but somewhat hesitant to
invest because of a perception that India has done less than other emerging
markets to reduce fundamental obstacles to investment. Companies
operating in India continue to face serious business constraints.
 This is partly because the government has deliberately moved to liberalize
the economy at a measured pace.
 FDI caps or restrictions continue to apply in a few key sectors.
 Meanwhile, a variety of other factors--such as
 excessive red tape,
 an opaque and complex tax system, and
 concerns about corruption--can dampen investors' enthusiasm.
 Other types of regulations also continue to hamper the flow of investment.
 For example, foreign companies are required to obtain a "no-objection"
certificate from their existing joint-venture partner if they wish to set up a
new venture in the same line of business in India.
 The World Bank ranks India 121st out of 181 countries as a place to start a
business.

5.  However, India's high level of bureaucracy dampens interest from
companies, which like to respond quickly to market forces, and slows down
the growth of the private sector
 Besides direct corporate income taxes, firms are subject to indirect taxes
such as
 excise duties and levies from individual states and municipalities. The
indirect tax system is frighteningly complicated.
 Corruption is another major deterrent.
 India's plethora of red tape and slow legal system create an environment that
fosters corruption.
 India ranked 85th out of 180 countries in Transparency International's
Corruption Perceptions Index 2008.
What is the government doing about it?
 Successive Indian governments have repeatedly emphasised their openness
to foreign investment.
 In 2008, the FDI limit in state-run refineries has been increased;
 the FDI cap in the mining sector has been removed;
 and foreign airlines have been given permission to buy stakes in certain
domestic civil-aviation companies.
 raising the upper limit on FDI in private insurance companies from 26% to
49%.
 The government is also currently reviewing some aspects of FDI policy to
ease bureaucratic controls and to define FDI rules more systematically.
 Most foreign investment has been brought under the automatic-approval
facility.
 This means that companies need not obtain permission from the government
or the central bank before investing;
 they simply file documents ex post facto with the central bank.
 The government has promised to decide on proposed FDI projects within 30
days.
 The dismantling of this "licence raj" and the computerisation of certain
services have helped to decrease corruption by reducing the number of
interactions required between the private sector and the government.
Key issues?
 Capital Flows and Balance of Payments
 Displacement of Indigenous production

6.  Extent of technology transfer
 Income distribution