FDI in Indian economy

FDI inflow ‘highest ever’ at $83.57 bn

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FDI, FPI

Mains level : Read the attached story

The foreign direct investment (FDI) in the financial year 2021-22 has touched a “highest-ever” figure of $83.57 billion.

Get aware with the recently updated FDI norms. Key facts mentioned in this newscard can make a direct statement based MCQ in the prelims.

Ex. FDI source in decreasing order: Singapore – Mauritius – Netherland – Ceyman Islands – Japan – France

What is Foreign Direct Investment (FDI)?

  • An FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
  • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
  • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
  • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
  • In a narrow sense, it refers just to building a new facility, and lasting management interest.

FDI in India

  • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
  • There are two routes by which India gets FDI.

1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

2) Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of FDI application under Approval Route.

  • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
  • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

Features of FDI

  • Any investment from an individual or firm that is located in a foreign country into a country is FDI.
  • Generally, FDI is when a foreign entity acquires ownership or controlling stake in the shares of a company in one country, or establishes businesses there.
  • It is different from foreign portfolio investment where the foreign entity merely buys equity shares of a company.
  • In FDI, the foreign entity has a say in the day-to-day operations of the company.
  • FDI is not just the inflow of money, but also the inflow of technology, knowledge, skills and expertise.
  • It is a major source of non-debt financial resources for the economic development of a country.

Significance of rising FDI

  • This is a testament of India’s status among global investors.

Recent amendments in 2020

  • The govt. has amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017.
  • In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership, such subsequent change in beneficial ownership will also require Government approval.

The present position and revised position in the matters will be as under:

Present Position

  • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
  • However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
  • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Revised Position

  • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.

[spot the difference]

  • However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
  • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

In response to China

  • China accused that India’s recently adopted policy goes against the principles of the World Trade Organisation (WTO).
  • It tends to violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.

 

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