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Category: Business and Industry
Date Submitted: 12/20/2010 08:10 AM
2010
Capital inflows in an economy
* an Indian perspective
Macroeconomics
Group# 7
Dec 2010
1. Introduction:
For economic development of a country capital plays an important role. One major source of capital is through external means or through capital inflows. Capital is those funds which are used for investment. When these funds are availed through foreign sources into an economy it is known as capital inflows.
Capital inflow can be due to the following factors:
* Foreign direct investment (FDI): It is a long term investment. It is investment through the purchase or construction of machinery, buildings or even whole manufacturing plants.
* Portfolio investment: It refers to the purchase of shares and bonds in an economy. It is usually a short term investment. Portfolio investments are generally more volatile and in sync with the domestic and international market sentiments.
FDI and Portfolio Investments are non debt creating investments in an economy.
* Other investments: It includes capital flows into bank accounts provided through either loans or aid.
It can be sub categorized into-
* External Assistance: Foreign aid availed through bilateral or multi lateral sources. Aid could either be through loans or grants. Grants are those funds which need not be repaid. Loans need to be repaid after a stipulated amount of time. However loans are known as aids only if the interest rates considerably lower and longer repayment periods. The loan giving country does not have the motive of earning profits through loans.
* External Commercial Borrowings: Loans availed through bilateral or multilateral sources.
* Trade credits are also a form of capital inflows for an economy.
* NRI deposits also form a significant amount of capital inflows.
Out of the above types of cash inflows FDI is the most sought after because:
* FDI supplements domestic investment.
* FDI does not pose any problem to...