Capital Flows to India Since Nineties

Abstract

Foreign capital supplements domestic savings and stimulates economic growth. Moreover, it enables countries to counterbalance fluctuations in income and attain smooth consumption flows. Capital inflows can help developing countries with economic development by providing them with necessary capital and technology. It relaxes two major constraints to economic growth i.e. resource gap and foreign-exchange gap. However, surge in capital flows have had associated problems as it may lead to exchange rate appreciation, excessive accumulation in foreign exchange reserves etc. Large and volatile capital flows may destabilize macroeconomic management. Since economic reforms India has undertaken various policy measures to liberalize capital inflows which has resulted in significant increase in amount of capital inflows and changed its composition. Capital inflows have undergone a compositional shift from predominantly official and private debt flows to non-debt-creating flows in the post-reform period. This paper focuses on various facets of capital flows to India and attempts to analyze the patterns and trends in capital flows to India since 1990s. The paper also discusses issues and challenges associated with surge in capital inflows.