The role of foreign investments in a developing economy is very vital and especially in its industrialization process. Since Independence India pursued a policy of overcaution mixed skepticism. Thus our policies towards inflow of foreign funds did not encourage the entry of foreign capital into the country. The Reserve Bank of India through its regulatory mechanism guided and controlled the flow of foreign capital in India. Whatever might have been the wisdom in pursuing such policy it was learned through experience in the later decades that foreign capital is an important means to achieve faster economic development of the country.
After a long wait of nearly 45 years pragmatism finally prevailed in the highest portal of decision-making with the announcement of the New Industrial Policy in 1991. and took a radically different attitude towards foreign capital. The foreign direct investment was allowed under the new regime in almost all sectors of the economy. The economy was opened up to bring it in tune with the global economy. And changes were effected in industrial and trade policies which were substantially liberalized .In the liberalized atmosphere the change in the attitude of the government was inevitable.
Foreign investments can be of two types direct as well indirect. The direct foreign investment which is also known as FDI and includes investments from non-Resident Indians and Overseas Corporate Bodies (OCB) . These are parts of the government efforts to supplement the domestic resources for the economic development of the country. Now FDI is permitted in all sectors including service sector with some sectoral caps. Even foreign investments are allowed in the SSI sector. Similarly such investments are allowed for trading activities with a cap. There are other modes of FDI like Global Depository Receipts, American Depository Receipts, Foreign Currency Convertible Bonds etc. Although India is endeavouring to catch up with China in attracting foreign capital but it is still way behind it.