(a) Analyse the sectoral inflows of FDI in India during the post-liberalisation period. (20 marks) (b) Critically discuss the…

Post-1991 reforms tied external capital, public-sector retrenchment and fiscal restructuring. The three issues show how India recalibrated the state-market relationship: FDI entered services, PSUs were opened to private capital, and states were given conditional fiscal space.

Sectoral FDI After 1991, FDI policy moved from case-by-case government approval to automatic route for many sectors, first up to 51 per cent and later 74 and 100 per cent, while sensitive sectors remained on the government route. Early inflows were concentrated in manufacturing, trading and telecom; by the 2000s services—IT/ITeS, telecom, financial services and business services—became a major recipient in annual flows. The shift was not a simple cumulative majority: DIPP equity data show services around 17-20 per cent of cumulative inflows, while manufacturing’s share fell to about one-quarter in later years. Computer software/hardware was often the largest single sub-sector when the composite services category was excluded. Greenfield investment supported new capacity in manufacturing, telecom and IT parks, while brownfield inflows rose through acquisitions and joint ventures. Agriculture’s share remained small and declined because of land, food-policy and regulatory constraints. Source-country data show heavy routing through Mauritius and Singapore, reflecting tax treaties and treaty shopping, which made sectoral analysis sensitive to conduit effects. The services bias reflected globalisation of IT, telecom liberalisation, financial-sector opening and India’s skilled-services advantage; the automatic route lowered uncertainty and encouraged brownfield M&A, while the government route in sensitive sectors slowed inflows. Thus, sectoral FDI was shaped by policy access, global value chains and source-country routing.

Private participation in PSUs The government used disinvestment and PPPs. Minority stake sales (1991-2000) raised revenue but left control with the state; strategic sales (1999-2004) transferred management control, as in VSNL to Bharti, Maruti to Suzuki and BALCO to Vedanta, while ONGC Videsh sales showed limits of strategic exit. CPSE restructuring, through mergers, closures and the National Investment Fund created from sale proceeds, aimed to make PSUs viable. PPP frameworks, especially Viability Gap Funding and IIFCL, targeted infrastructure where private capital needed long-term finance and risk-sharing. Critically, these strategies were uneven: valuation controversies, political opposition, employee resistance and incomplete privatisation—residual government stakes, regulatory capture and weak exit—reduced efficiency gains. Minority stakes improved governance but did not change ownership; strategic sales attracted global buyers but faced political and union resistance; PPPs mobilised private capital for roads, power and urban infrastructure but VGF and IIFCL could not fully address land acquisition, clearances and tariff risk.

Twelfth Finance Commission The 12th Finance Commission strengthened fiscal federalism by recommending a larger devolution of central tax proceeds to states and a debt-relief scheme for 2005-10. It linked relief to FRBM enactment, revenue-deficit elimination and lower interest rates on central loans, reducing interest burdens and disciplining borrowing. Under Article 275, it continued non-plan revenue deficit grants while adding purpose-specific grants, including local-body grants for Panchayati Raj and municipal institutions, with conditions for capacity building. These were precursors to later GST compensation arrangements. The approach improved fiscal discipline and state capacity, but conditionalities constrained state autonomy, and local-body grants remained limited by weak institutions and implementation. The 42 per cent devolution gave states a predictable share of central taxes, while debt relief addressed vertical imbalance.

Conclusion The post-liberalisation pattern is coherent: FDI favoured services, private participation focused on infrastructure, and fiscal federalism tried to make states fiscally sustainable. The interactions matter: services-led FDI strengthened urban infrastructure demand, PSU reforms sought to fill infrastructure gaps, and fiscal federalism aimed to give states capacity to deliver services and invest. A way forward is to broaden FDI into manufacturing and agriculture, complete PSU reforms with transparent valuations, and balance fiscal conditionalities with state and local autonomy.