Private foreign investment in India: Pain or panacea?

India's experience with private foreign capital is interesting, especially in view of its recent attempts to liberalise a regime that was notoriously hostile to foreign investors. We scrutinise the role private foreign capital has played in India over the last five decades. In particular, we study the conduct and performance of foreign-controlled firms relative to domestic firms; unlike previous studies that have looked at this issue over short periods of time, we examine long-term trends in relative performance. Our study focuses on aggregate behaviour; this allows us to explore an issue ignored in previous studies, namely the macroeconomic linkage between the overall trade and industrial regime and policy towards foreign capital. Section 2 reviews the policy framework towards foreign capital in India; Section 3 examines the long-term trends in foreign investments; Section 4 assesses the importance of foreign-controlled firms in Indian manufacturing and their performance relative to domestic firms. Section 5 attempts to evaluate the contribution of foreign capital to the Indian economy, including the consequences of recent liberalisation. Section 6 outlines the policy implications.