Foreign Capital Inflow

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Effects of Foreign Capital Inflow on the Economy

Recently India’s Home Minister Mr. P. Chidambaram pointed out that surge in foreign capital inflow can be a cause of the rise inflation rate in the economy. This is true! With opening up of the economy, foreign capital has become one of the important factors affecting our economy. The country’s economic policies have changed. We are now an open economy affected by the economic and political happenings of the world. We therefore need to broaden our handling of domestic economic problems like inflation. Inflation is no more only due to supply constraints caused by domestic supply constraint caused by poor monsoon or floods. It is affected by global demand and supply of goods and capital.
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Covers debt and Current Account Deficit of Balance of Payment- Foreign capital inflow adds to our foreign exchange reserves, which is a cushion for the country’s Balance Of Payments.The reserve is used to cover maturing international debts and to cover the current account deficit of the Balance of Payment.
India has certainly reaped these benefits as now the country is recognized as a growing/emerging economy. The country is coming out of the ‘Less Developed Country’ tag. Foreign Capital inflow has given a boost to our industrial and social growth and also provided the savings to undertake essential infrastructure development works. Prior to the nineties decade, the country depended heavily on foreign aid and debt. The huge accumulation of debt from continuous international borrowings put tremendous pressure on the country’s Balance of Payment. We had no other source of repaying debts or covering the growing fiscal and current account deficits, other than more borrowings. The country has done away with that painful situation. Today dependence on aid has vanished. Now FDI (Foreign Direct Investment), FPI (Foreign Portfolio Investment) and NRI (Non Resident Indian) deposits dominate the capital flows in the country.

Drawbacks of Foreign Capital

* Appreciation of Real Exchange Rate- As more foreign investors
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