Cross-border Movement of Capital
The economic reforms which were initiated in the early nineties have led to expansion of trade and commerce on a scale not seen before. And the capital and current account convertibility is one of the areas where reforms have facilitated movement of capital in a noticeable manner. Although the convertibility is fully permissible in the case of current account transaction it is partial in capital account transactions. Capital flows are normal phenomena in the international trade and commerce and there are a variety of reasons behind them. Existence surplus and deficit capital could be cited to be one reason. The inflow of capital from the surplus countries into the capital-starved one is a very common feature.
The savings garnered by the capital rich countries through households as well as institutions seek opportunities for efficient and remunerative deployment. Similarly there is intense competition amongst the capital-deficit countries to attract positive capital inflows which go into achieving faster economic progress and development. It may take diverse forms viz., foreign direct investment, portfolio investments etc. and we can see how Foreign Institutional Investors have set up shops in India and guiding the directions of our capital market. Thus it is a two-way traffic! And the success in this respect is greatly dependent on the investment environment of a particular country. For instance , there was a time when there was plethora of restrictions on all kinds of foreign exchange transactions. Even expenditure on foreign tour and travel used to be closely monitored by the Reserve Bank of India. The entry of foreign capital was viewed with some of degree of suspicion and skepticism .
The existence of such rules and regulations imposed on the movement of foreign flow also encouraged the practice of under or over-invoicing. This is a practice of over-valuing or under-valuing our export and import transactions.
Although the scenario has changed dramatically in the liberalized environment and the Reserve Bank of India permitting investment through automatic approval route and allowing FIIs and proprietary funds to invest in dated Government securities and to purchase and sell treasury bills etc., India is still way behind China in attracting foreign investments.
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