Foreign Investment, Foreign Trade and Related Issues: A Case Study for India and China

Abstract

The unprecedented build-up of foreign exchange reserves in India, to the tune of US$ 120 billion (1 August, 2004) after the payment of more than US$ 2 billion debt by the Reserve Bank of India (RBI), is seen as a sign of economic growth. In the early 1990s, when India’s foreign exchange reserves were averaging close to US$ 5.5 billion, the country was in a balance of payment (BOP) crisis. The RBI’s balance of payment statistics suggest that about US$ 1.3 billion of these reserves are on account of foreign direct investment (FDI) inflows during the year 2002-3. A healthy increase in FDI inflows in India in a global slowdown cannot detract from the fact that India accounts for an extremely small share of FDI inflows. China attracts 80 per cent of the FDI inflows in Asia against India’s 5.5 per cent. China’s membership at the World Trade Organisation (WTO) from November 2001 is likely to widen this gap.

I thank Mr Andrew Sumner, Development Studies Subject Area Leader, University of East London for reviewing this chapter and giving positive and useful suggestions.