INTRODUCTION

India's approach to foreign investment has evolved from strict protectionism to a liberalisation of its exchange control laws. This chapter attempts an analysis of the safety and stability currently afforded to foreign investment in India by its laws and the legal redress available in India. India has only equivocally, opened its doors to foreign capital despite the compelling argument for attracting greater foreign investment and thus rapidly expanding its economy. Yet as India advances to being one of the world's largest economies, new conundrums are arising, including whether India can adequately protect its own investments abroad.

THE HISTORICAL CONTEXT

India has been a trading nation from antiquity. Yet for several decades after 1947, when India attained independence from British rule, its economic philosophy reflected its reaction to Western colonialism and was largely protectionist.

The British were the predominant colonial power in South Asia (now India, Pakistan, Bangladesh, Sri Lanka and Burma). The devastation of Indian industry and trade over about 190 years of colonisation was achieved by taxation and expropriation. India was reduced to a deindustrialised exporter (largely to Britain) of raw materials such as cotton, jute, silk, coal, iron ore, rice, diamonds, spices and tea. Colonial rule left India penurious and distrustful of foreign business interests. In 1700, India's share of the world economy had been a staggering 23 percent; equal to all of Europe. At the end of British colonial rule it was 3 percent.

EXPROPRIATION AND PROTECTIONISM

India enacted the Foreign Exchange Regulation Act 1947 (FERA 1947) with the limited object of regulating the outflow of foreign exchange from India. FERA 1947 was initially introduced as a temporary measure, and it was only in 1957 that it was made permanent. FERA 1947 subjected persons and entities resident in India to exchange control regulation. The controls were not stringent and India permitted business to be carried on relatively freely by branches of foreign firms and companies in which non-residents had a substantial interest.

By the late 1960s India's economic policy had become protectionist and state oriented. India nationalised several industries including the Indian subsidiaries of foreign oil companies Esso, Burmah-Shell and Caltex, then in 1969 all major private Indian Banks and in 1980, jute companies.