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Foreign investment plays a very important role in the new economic policy (NEP) launched in India to encounter the economic crisis of ninety. The main objective of NEP has been to achieve a higher level of economic growth. The strategies that were adopted as the measures for the development of the economy were devaluation, restrictive monetary target, minimization of the physical deficit, trade liberalization, privatization of industrial sectors and opening of the economy for foreign investment and competition. Among them foreign investment plays a most vital role. The inflow of foreign investment was encouraged to bridge the investment gap particularly in the industrial sector.
Foreign investment was supposed to bring technology, marketing enterprise, managerial techniques and new possibilities of import promotion. For promoting foreign investment in high priority industries and advanced technology, it was decided to provide approval for direct foreign investment upto 51% of foreign equity (earlier 40% in such industries). This change was expected to make Indian policy on foreign investment more transparent. Such a framework would make it easy for foreign companies to invest in India.
The NEP 1991 can be regarded as minor revolution as far as decisions concerning foreign investment and foreign technology agreements are concerned. The various changes in the foreign investment policy can be broadly classified into four categories.
Choice of Product: The number of products in which foreign investment is freely permitted has been significantly increased.
Choice of Market: The foreign investors are free now to compete with the domestic producers in the Indian market.
Choice of Ownership Structure: In most cases, the foreign investor is free to own a majority share in equity.
Simplification of Procedures: Foreign direct investment (FDI) flows through three different routes.
The first is with automatic approval by the Reserve Bank of India.
The second route for foreign direct investment is from multinational companies on their Indian partners who want to invest in an industry outside these 35 sub-sectors or when an FDI holding or more than 51% is sought, permission has to be taken from the Secretariat of Industrial approvals (SIA) or the Foreign Investment Promotion Board. (FIPB).
The third route is investment by non-resident Indians.
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