Here is a compilation of essays on ‘Foreign Capital’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Foreign Capital’ especially written for school and college students.
Essay on Foreign Capital
Essay Contents:
- Essay on the Introduction to Foreign Capital
- Essay on the Indian Governments Policy towards Foreign Capital
- Essay on the Advantages of Foreign Capital
- Essay on the Disadvantages of Foreign Capital Investment
- Essay on the Foreign Capital in India
- Essay on the Utilisation of Foreign Capital
Essay # 1. Introduction to Foreign Capital:
Foreign capital can be obtained either in the form of concessional assistance or non-concessional flows or foreign investment. Concessional assistance includes grants and loans obtained at low rates of interest with long maturity period. Such assistance is provided generally on bilateral basis (government to government) or through multilateral agencies like the World Bank, International Development Association etc. Loans have generally to be repaid in terms of foreign currency but in certain cases the donor may allow the recipient country to repay in terms of its own currency.
For instance, the U.S. Government allowed the Government of India to repay loans under PL 480 in terms of rupees. Grants do not carry any obligation of repayment and are mostly made available to meet some temporary crisis. Non-concessional assistance includes mainly external commercial borrowings, loans from other governments/multilateral agencies on market terms and deposits obtained from non-residents. Foreign investment is generally in the form of private foreign participation in certain sectors of the domestic economy.
The main advantage of this from of assistance is that generally the foreign investor also brings with him technical expertise, machines, capital goods, etc., which are scarce in underdeveloped countries.
The disadvantage is that a large part of the profits are repatriated to the foreign investor. If the underdeveloped country in question chooses to depend too much on private foreign investment, it would be risking too much interference in the conduct of its affairs. This would be against the long-term interests of the country.
In addition to these forms of assistance, the underdeveloped country can also receive direct supplies of agricultural commodities (food grains etc.) or industrial raw materials to face temporary shortages in the economy.
Essay # 2. Indian Governments Policy towards Foreign Capital:
At the time of Independence, the attitude towards foreign capital was one of fear and suspicion. This was natural on account of the previous exploitative role played by it in ‘draining away’ resources from this country.
The suspicion and hostility found expression in the Industrial policy of 1948 which, though recognizing the role of private foreign investment in the country emphasized that its regulation was necessary in the national interest. Because of this attitude expressed in the 1948 Resolution, foreign capitalists got dissatisfied and as a result, the flow of imports of capitals goods got obstructed.
As a result, the Prime Minister had to give following assurances to the foreign capitalists in 1949:
1. No Discrimination between Foreign and Indian Capital:
The Government of India will not differentiate between the foreign and Indian capital. The implication was that the government would not place any restrictions or impose any conditions on foreign enterprise which were not applicable to similar Indian enterprise.
2. Full Opportunities to Earn Profits:
The foreign interests operating in India would be permitted to earn profits without subjecting them to undue controls. Only such restrictions would be imposed which also apply to the Indian enterprise.
3. Guarantee of Compensation:
If and when foreign enterprises are compulsorily acquired, compensation will be paid on a fair and equitable basis as already announced in government’s statement of policy.
Though the Prime Minister stated that the major interest in ownership and effective control of an undertaking should be in Indian hands, he gave assurance that there would be “no hard and fast rule in this matter”.
Despite the above assurances, foreign capital in the requisite quantity did now flow into India during the period of the First Plan. The atmosphere of suspicion had not changed substantially. However, the policy statement of the Prime Minister issued in 1949 and continued practically unchanged in the 1956 Industrial policy Resolution, had opened up immense fields to foreign participation. In addition, the trends towards liberalization grew slowly and gradually more strong and the role of foreign investment grew more and more important.
The government relaxed its policy concerning majority ownership in several cases and granted several tax concessions for foreign personnel. Substantial liberalisation was announced in the New Industrial policy declared by the government in July, 1991 and doors of several industries have been opened up for foreign investment. Prior to this policy, foreign capital was generally permitted (as a matter of policy) only in those industries where Indian capital was scarce and was not normally permitted in trading activities, plantations, banking and financial institutions.
It was not permitted in those industries which had received government protection or which are of basic and/or strategic importance to the country. The declared policy of the government was to discourage foreign capital in certain ‘inessential’ consumer goods and service industries. However, this provision as frequently violated as a number of foreign collaborations even in respect of cosmetics, toothpaste, lipstick etc. were allowed by the government. It was also stated that foreign capital should help in promoting, exports or substituting imports.
The government also laid down that in all those industries where foreign capital investment is allowed, the major interest in ownership and effective control should always be in Indian hands (this condition was also often relaxed). The foreign capital investments and technical collaborations were required to be so regulated as to fit into the overall framework of the plans.
In those industries where foreign technicians and managers were allowed to operate as Indians with requisite skills and experience were not available, vital importance was to be accorded to the training and employment of Indians in the quickest possible manner.
In a bid to attract foreign capital and investments from Non- Resident Indians (NRIs), the government has in recent years announced a number of tax concessions, lower rates of taxation for certain designated priority industries, tax holiday on profits for a certain period to new industrial undertakings etc. NRIs investing in India were allowed higher investment limits, priority allotment of items in short supply, permission to buy shares in Indian companies etc. However, the real ‘opening up’ came with the announcement of the new industrial policy in July 1991.
The important measures announced in July, 1991 and afterwards are as follows:
1. The government has prepared a specified list of high- technology and high-investment priority industries wherein automatic permission will be available for direct foreign investment up to 51 per cent foreign equity.
Annexure III contains a list of 35 priority industries divided into the following areas:
(i) Metallurgical industries,
(ii) Boilers and steam generating plants,
(iii) Electrical equipment,
(iv) Telecommunication equipment’s,
(v) Transportation,
(vi) Industrial machinery,
(vii) Agricultural machinery,
(viii) Industrial instruments, and
(ix) Chemicals (other than fertilisers).
This facility of 51 per cent foreign equity participation will be available to those firms which are able to finance their capital equipment imports through their foreign equity.
2. A special empowered board has been constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas. This would be a special programme to attract substantial investment that would provide access to high technology and world markets. The investment programmes of such firms would be considered in totality, free from pre-determined parameters or procedures.
3. Prior to 1991 the government generally discouraged foreign equity holdings in service areas except for hotels. The 1991 policy has invited foreign equity holdings upto 51 per cent by international trading companies. In addition to hotels, 51 per cent equity will also be welcomed in other tourist related areas.
4. The new industrial policy provides for automatic approval to foreign technology agreements in the case of the 35 priority industries listed in Annexure III within certain guidelines. For the present, these guidelines will allow royalty up to 5 per cent of domestic sales and 8 per cent of export sales, along-with lump sum technology payments of up to Rs. 1 crore. This automatic permission would be available to other industries also-if the payments can be made without resort to free foreign exchange resources.
5. To hasten the progress in the ailing power sector, the government (in a policy decision announced on July 31, 1991) has allowed 100 percent foreign equity participation for setting up power plants in the country. Hundred per cent foreign equity participation allows free repatriation of profits and other incentives. Besides, it will help foreign parties to set up power plants without delays which considerably escalate the cost.
6. Hiring of foreign technicians and testing of indigenously developed technology abroad earlier required case-by-case approval by the government. This involved unavoidable delay. Henceforth, no permission will be necessary for these purposes.
7. NRIs and Overseas Corporate Bodies (OCBs) predominantly owned by them, were allowed in 1992-93 to invest upto 100 per cent equity in high-priority industries with reparability of capital and income. NRI investment upto 100 per cent of equity is also allowed in export houses, trading houses, star trading houses, hospitals, EOUs, sick industries, hotels, etc. Foreign citizens of Indian origin are now permitted to acquire house property without the permission of the Reserve Bank of India.
8. Provisions of the Foreign Exchange Regulation Act (FERA) have been liberalised through on Ordinance dated January 9, 1993 as a result of which companies with more than 40 per cent of foreign equity are also now treated on par with fully Indian owned companies.
9. Foreign companies have been allowed to use their trade marks on domestic sales from May 14, 1992.
10. The government has allowed reputed Foreign Institutional Investors (FIls) including pension funds, mutual funds, asset management companies, investment trusts, nominee companies and incorporated or institutional portfolio managers to invest in the Indian capital market subject to the condition that they register with the Securities and Exchange Board of India (SEBI) and obtain RBI approval under FERA. Portfolio investments by the FIIs in the primary and secondary markets are subject to an overall ceiling of 24 per cent of the issued share capital in any company.
11. Disinvestment of equity by foreign investors no longer needs to be at prices determined by the Reserve Bank. It has been allowed at market rates on stock exchanges from September 15, 1992 with permission to repatriate the proceeds of such disinvestment.
12. Foreign investors can invest in Indian companies through the Global Depository Receipts (GDR) route without any lock-in-period. These Receipts can be listed on any of the overseas stock exchanges and denominated in any convertible foreign currency.
Essay # 3. Advantages of Foreign Capital:
Poor nations need foreign capital to improve their economy. But this investment too has its problems. But foreign capital has certain adverse effects on the economy of poor nations as well.
1. To Meet Foreign Exchange Needs:
In a poor country there is always shortage of resources. It is also always in a hurry to industrialise itself. But till the needs of the people cannot be deferred, these can be met by importing goods from various countries, where these are available. For this foreign exchange is needed. No poor nation has enough foreign exchange resources to meet these demands, with the result that these nations are always dependent upon the rich ones for meeting their foreign exchange needs, for which foreign assistance is unavoidable.
2. Need for Supplementary Resources:
Poor nations have very limited resources. In many cases, these are so limited that these cannot meet even minimum basic needs of the people. At the same time, these nations cannot hope to raise funds from internal resources, due to low paying capacity of the people. These nations therefore, need additional capital, by which these can supplement their resources. These supplementary resources can be available only from the foreign capital.
3. Necessary for Meeting Domestic Needs:
Poor nations are always in a vicious circle. These want to industrialise themselves, and to become self-sufficient. But for that money is needed which these cannot raise. In this way a never ending circle goes on. In order to break it, it is essential that the poor nations should have sufficient assistance from abroad and needless to say that foreign capital can go a long way in breaking the circle.
4. Better Mobilisation of Domestic Resources:
Usually it is seen that in poor countries the capital is shy and the masses wish to avoid payment of taxes, mostly because they are poor and have no paying capacity. But when foreign capital is prepared to invest in the country, on the condition that domestic capital is also available, then national capital begins to come forward. Not only this, but also the government makes every effort to see that national resources are mobilised and made available to the foreign investor, so that economic growth of the country does not suffer. Thus foreign capital helps in Mobilisation of economic resources.
5. Helps in Completing National Projects:
For economic development of a nation, it is essential that the nation should undertake projects which can accelerate economic growth. These projects can be setting up of new industries, modernising of existing industries, thereby increasing output and making them work to the fullest capacity and so on.
These projects can accelerate economic growth of the nation. But usually each project for its installation and completion will need foreign exchange. In its absence, not only this that economic growth will slow down, but the projects may even not be completed.
6. Multipurpose Schemes can be Undertaken:
A poor nation may take up short term and single purpose schemes; but at the same time may give up costly multipurpose schemes, on the plea that these are beyond nation’s reach. It may abandon them clearly knowing that if executed; these can help solving nation’s many problems very easily and quickly.
These schemes might also be abandoned simply because their completion will take very long item and the nation may not be in a position to strain resources for such long periods. Accordingly the nation might feel discouraged to take such projects on hand. But once foreign assistance and capital is available, the nation will definitely feel encouraged and tempted to undertake those projects.
7. Helps Maintaining Consumption Level:
Consumption level of the population in poor countries is very low. The masses have very poor income and as such cannot spend on anything and everything. Their purchasing power is very low. In case out of this limited income they are required to pay heavy taxes, their spending vis-a-vis consumption capacity will very much go down. When foreign capital is available to the people are not taxed heavily and as such they can maintain their minimum consumption standard.
8. Helps in Providing Employment:
One of the most serious problems of the poor countries is that of un-employment. Due to non-industrialisation, there are limited employment opportunities. The state is not in a position to provide employment by undertaking any multi-purpose long term costly project. The nation is not in a position to provide any employment even to very competent and
qualified people.
The result of all this is that discontentment and dissatisfaction among the people increases. But when the foreign capital is available, new industries and projects can be started. The nation goes fast on the path of industrialisation. With this employment opportunities are bound to increase.
9. Help in Maintaining Financial Stability:
When a poor nation has limited economic resources and heavy demands by the people, one of the methods adopted is that of issuing paper currency without taking proper measures for checking inflationary tendencies. The result is that the value of the currency considerably goes down.
The nation is forced to devalue its currency in the international market, creating many more problems for the people. Purchasing capacity of the people still more goes down. There is great economic stability in the country.
The only way out to solve the problem is that of getting assistance from the foreign countries. With the aid of advanced countries, it becomes possible to meet demands of the people without much straining nation’s resources.
10. Exploitation of Resources:
Nature has blessed each country with some resources. These are very useful for the development of a country, if properly exploited. Rich countries have enough capital and technical knowhow to exploit those resources whereas poor nations have neither technical personnel, nor economic resources nor other facilities to exploit the resources.
The result of all this is that poor nations cannot make their proper use. These remain buried where these are. In case foreign capital is available and these resources can be properly exploited, then many economic problems of a poor nation can be solved.
11. Helps in Proper Utilisation of Man Power:
In developing countries usually there is population explosion and surplus manpower, which creates many social and economic problems instead of solving them. In case foreign capital is available, services of the surplus manpower-skilled, semi-skilled and unskilled can be used for constructive purposes, instead of destructive ones, as is the case in many poor nations these days.
12. New Techniques of Management:
Under developed or undeveloped nations usually do not have much knowledge about new and latest management techniques; with the result that even if foreign capital is made available to them, these might not be in a position to efficiently use that. But when a nation provides some assistance to another, usually new management techniques are discussed and even arrangements are made for providing sufficient training for new management techniques.
13. Helps in Research:
Research in all walks of life is a very costly affair, when poor nations cannot afford. But unless research is done, it is difficult to find out new avenues for development. Therefore, a situation is created in which without research there is no advancement and without money there is no research. This problem can best be solved if foreign assistance is available, either in the form of capital grant or necessary research facilities are made available to the nation.
14. Helps in Creating Permanent Assets:
Many new projects are undertaken with the help of foreign capital. These include construction of roads, bridges, dams, railways etc. etc. The foreign agency which constructs them, cannot take these capital projects back after agreements providing financial assistance are over.
These become permanent assets of the country, which can be used for all subsequent programmes of development. Had foreign capital not come to the aid of the poor countries, they would not have been in a position to build up these assets and their whole programme would have come to a standstill for quite sometime.
Foreign capital plays a very big and important role in the growth and development of economy of a poor nation. In many cases it even does pioneering work, in the sense that the money is spent in those projects, in which native capital is shy feeling that the money might not sink. The risk of loss is thus boldly borne by the nations which advance loan and importance of this aspect cannot be under-estimated in any manner.
Essay # 4. Disadvantages of Foreign Capital Investment:
1. Makes the Nation Dependent:
It is said that when foreign capital is available, the nation becomes dependent. The people themselves become lazy and lethargic. They do not work hard, since they know that for completing their projects, some country or the other will come forward with financial assistance. They would otherwise have worked hard and tried to ensure that with their own labour, their programme should be completed and targets achieved.
2. Opposed to Self Sufficiency:
Then another disadvantage is that this type of aid is opposed to idea of self-sufficiency. When foreign aid is available, then poor nations becomes slow in achieving self-sufficiency. These are in no hurry to set up machinery or acquire technical knowhow very speedily or readily.
3. Encourages Inflationary Tendencies:
Each nation has its own economic policies and programmes, which must keep pace with its economic resources. Budgets are prepared and finalised on the basis of those estimates. But when foreign money pours in. particularly unexpectedly, then more money become available.
It gets circulated and upsets the whole economy. Inflationary tendencies get encouragement. In this way poor nations are faced with the serious problem of inflation. We know that once this circle starts it becomes difficult to check that.
4. Sudden Burden on the Nation:
In order to meet the demands of the people or to gain popularity, the government of the day goes on borrowing. But after sometime, the question of repayment of the loan comes. At that time the nation is forced to save out of its limited resources. The result is that there is sudden burden on national economy, which many poor nations cannot afford. The result is that economies of many recipient nations are shaken from the very foundations.
5. Politically Unhealthy Effects:
Powerful and economically well off, almost always try financial aid to have direct or indirect strings attached to aid In case there are no such visible strings, the expectations always are that the recipient nation will depend on the powerful nation. In this way foreign aid upsets, political behaviour of the poor nations and makes them politically dependent on the powerful nations.
6. Heavy Cost of Foreign Capital:
Usually foreign capital is invested in an industry in which there are chances of quick returns and heavy profits. In fact when foreign capital is invested, share is demanded in profits and the investor is given some dividend. The capital also charges some interest.
Thus usually interest, dividend and profit come to about 40% of the total return. Thus 40% of the total income is drained out and only 60% is left for the labour of the natives. This drainage of 40% is obviously not reasonable or justifiable.
7. Undependable in Difficulties:
Foreign capital has always a tendency to earn maximum profit. This tendency becomes still more visible when the economy of the recipient nations begins to totter down. At this stage foreign investment should sick firmly to the aid of the poor country. But it is at this stage that it begins to withdraw itself.
8. Money cannot be Invested in Key Sectors:
Maximum investment is needed in key sector industries and it is in the development of these sectors e.g. manufacture of defence material, installation of steel factories etc. that every nation is most interested. But it is unfortunate that money cannot be spent in these sectors because that would mean leakage of national secrets, which can harm any nation, particularly when hostilities break out.
9. Exploitation of Natural Resources:
With the foreign capital there is always ruthless exploitation of natural resources resulting in unbalanced economic development. While spending, foreign nations always keep their interests before the interest of the recipient nations.
10. Natives Denied Responsible Jobs:
After the capital has been invested the loaning nation is very keen that it should preserve its interests and the capital. This is done by keeping all the key posts with itself. In this way their own incompetent people are preferred over competent natives. Thus all important jobs are denied to the natives and also they are not given proper training, so that they can deal with their own affairs in a most competent manner, after the foreign power has left the land.
Of course, inflow of foreign capital has its bad effects and influences on the economy of a poor nation and even sometimes may do considerable harm, yet no poor nation can ever think of disowning it. If the people are courageous, determined and decided to end dependence quickly, all that they can do is that with their efforts, and proper use of foreign capital they can reduce the period of dependence and nothing beyond that.
Essay # 5. Foreign Capital in India:
Prior to Independence, there was substantial amount of foreign investments in India. Much of this capital was engaged in plantations and extractive industries. Almost the entire tea plantations, most of the jute mills, petroleum sector, rubber industries and many of the consumer goods industries were owned by the foreign capitalists. Largest share of foreign investments in India belonged to the United Kingdom followed by the USA.
The other important countries who had made investments in India were Japan, Holland, France, West Germany and Canada. However, after Independence, the policy of the Government of India laid emphasis on accepting foreign investments with the majority participation of the Indian nationals. Further many of the foreign enterprises, particularly those in the petroleum sector were nationalised.
Equity capital of many others was diluted to give major share of ownership, management and control to the Indians. Consequently, the flow of foreign investments declined and became almost a trickle in the past few decades. Consequently, the Government adopted a more liberal policy towards foreign investments.
Essay # 6. Utilisation of Foreign Capital:
It is abundantly clear that no poor nation can make progress and go on the path of prosperity, unless capital from outside pours in. This leads us to another question, namely what is proper utilisation of foreign capital.
Some of the important methods which can be suggested in this regard are:
1. Use for Self Generation of Economy:
Foreign capital should be used for self-generating economy. When the capital is being used for setting up machines and industrialising the country, there will be growth in the economy. The capital spent will help in the generation of further capital. In this way dependency will reduce and economy will generate itself.
2. Should be Treated Supplementary and Not Substitute:
Foreign capital should always be treated as supplementary to the national capital and not substitute for it. In case it is considered as substitute, then there will be lethargy and slackness. The natives will feel that they have a substitute for their labour. If on the other hand it is considered as supplementary, then the intention will be that unless capital from national resources is available, foreign capital will have no meaning. It would mean equally hard work for creating capital form internal resources.
3. Should be Used for Creating Permanent Assets:
It is most essential that the capital should be used for creating permanent assets. Once these assets have been created then the nation will continue enjoy the benefits of these assets; no matter whether the loaning nation continues to extend financial support or not. Obviously after the creation of the assets, the nation which extended financial assistance cannot take them back.
4. Should be Used for Priority Projects:
Loan is not a charity. It is to be repaid with profit and interest; it is therefore, just burdening coming generations. Therefore, it should be spent only on priority projects. If the loan is being made available for low priority projects the nation may not even accept that. Therefore, only such loans should be obtained and utilized for the purpose for which the nation has fixed a priority.
5. Least Spent on Consumable Goods:
Usually there is tendency on the part of the poor nations that these spend heavily on the import of consumption goods, just to meet immediate demands of the people. The money spent on the import of consumption goods as cosmetics, stationery goods etc. is merely a waste and a costly luxury, which the nation cannot afford because money spent on the import of these goods is not better than the money wasted and this wastage should be saved for proper utilisation of foreign capital.
6. Should be Invested in Collaborative Projects:
One of the methods, which can be suggested for proper utilisation of foreign capital, is that it should be invested in collaborative projects. Before the start of the project the loaning nation must clearly indicate its commitments and the recipient nation has clear idea about its responsibilities.
In this way there is a joint effort to complete the project. But as already said the poor nation should clearly understand that the project is covered under the priority areas and not that a secondary project is getting priority over the primary project simply because foreign loan for the former is available.
7. Should be Spent Under National Management:
Foreign capital can be better utilised, if it is spent under national management. It can be properly utilised, if it is considered as a training ground for the local people and their managerial capital capacity is best developed and they are made to learn how best the alternatives are available to the nation, for spending available foreign capital.
8. Used for Producing Finished Goods:
A nation can only earn, if it can produce finished goods. If it goes on producing only raw material, then that will have to be taken out of the country normally at low rates of payment it will be turned into finished goods and sold in the same country which supplied raw material, at higher rates and the profit will be kept by the nation which turned material into finished goods. It will be proper and scientific use of foreign capital, if that is used for producing finished goods, instead of simply producing some raw material in rude or refine from and so on.
9. Improvement of Quality:
It is seen that some of the poor nations produce a commodity, which is of poor quality. Due to lack of sophisticated equipments of production, the goods cannot be produced in bulk, with the result that the cost also cannot come down.
The outcome of this is that goods cannot compete international market. Not only this, but the problem is that local people also do not accept low quality goods and they prefer foreign goods over the locally manufactured goods. They do not patronise local industry which at first suffers losses and then closure.
The Government is forced to spend heavily on the import of better quality goods from outside. If the foreign capital is available, one of its best use will be to use that for the improvement of quality of the goods already being produced, so that, these are acceptable to the society on the one hand, and can face international competition on the other.
These are some of the suggestions which can be made for proper utilisation of foreign capital. But it must be remembered that the conditions of economy differ from nation to nation and those who are on the spot can best decide about proper utilisation of available foreign capital, on thing however, all the nations take into consideration is that inflow of foreign capital, does not strain national economy, by creating inflationary tendencies and trends.