ABSTRACT
This chapter examines the effects of capital inflows on the Indian economy undertaking a firm-level study of the Indian manufacturing sector for the period 2001 to 2010. However, the foreign capital can prove to be detrimental to the recipient countries, which are mostly emerging market economies (EME), by exposing them to disruptions and disturbances abroad leading to surges of capital inflows and of massive capital outflows. According to the neo-classical growth model, the free flow of capital between countries is beneficial for all. This leads to a more efficient allocation of financial resources increasing investment and employment opportunities further intensifying growth. In the equity market, India seems to have undoubtedly reaped benefits from the experience of foreign investments. During the 1980s, when the current account deficit was widening, the major sources of inflows were the short-term borrowings and deposits from non-resident Indians (NRI), which is part of the reason for the balance-of-payments crisis of 1991.
