Foreign Direct Investment (FDI) – UPSC Prelims

Foreign Direct Investment(FDI):
  • Foreign Direct Investment(FDI) is the medium for acquiring ownership of assets in one country (the home country) by residents of other countries.
  • FDI may result in control of the production, distribution, and other activities in a firm in the host country.
  • FDI is considered a major source of non-debt financial resources for economic development.
  • However, FDI is distinguished from Foreign Portfolio Investors(FPI) in which a Foreign investor merely purchases equities of companies.
Routes through which India gets FDI:
  • Automatic Route: In this, the foreign entity does not require the prior approval of the government or the RBI.
  • Government route: In this, the foreign entity has to take the approval of the government.
Sector Specific Conditions for FDI:
  • Mining and Exploration of metal and non-metal ore – 100% FDI through Automatic Route
  • Coal & Lignite — 100% FDI through Automatic Route
  • Defence Industry — 100%. However, Automatic is only up to 74%. Beyond 74%, it is a Government route wherever it is likely to result in access to modern technology or for other reasons to be recorded.
  • Print Media and Digital Media — 26% through Government Route
  • Intermediaries or Insurance Intermediaries — 100% FDI through Automatic Route
  • E-commerce activities — 100% FDI through Automatic Route
  • Single Brand Product Retail Trading — 100% Automatic
  • Multi Brand Retail Trading — 51% through Government route
  • Railways Infrastructure —100% FDI through Automatic Route in the construction, operation and maintenance of the railway transport sector: Suburban corridor projects through PPP model and High-speed train projects.
Prohibited Sectors: FDI is prohibited in:
  • Lottery Business including Government/private lottery, online lotteries, etc.
  • Gambling and Betting including casinos etc.
  • Chit funds
  • Nidhi company
  • Trading in Transferable Development Rights (TDRs)
  • Manufacturing of cigars, cheroots, cigarettes, tobacco, or of tobacco substitutes
  • Activities/sectors not open to private sector investment e.g.(I) Atomic Energy and (II) Railway operations (other than permitted activities).
  • Real Estate Business or Construction of Farm Houses
  • ‘Real estate business’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts(REITs) registered and regulated under the SEBI(REITs) Regulations 2014.
Previous Year Questions:
Q 1. Which of the following would include Foreign Direct Investment in India? (2012)
  1. Subsidiaries of foreign companies in India.
  2. Majority foreign equity holding in Indian companies.
  3. Companies exclusively financed by foreign companies.
  4. Portfolio investment.
Select the correct answer using the codes given below:
(a) 1, 2, 3 and 4
(b) 2 and 4 only
(c) 1 and 3 only
(d) 1, 2 and 3 only
Ans: (d)
Q 2. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (2020)
(a) It is the investment through capital instruments essentially in a listed company.
(b) It is a largely non-debt creating capital flow.
(c) It is the investment which involves debt-servicing.
(d) It is the investment made by foreign institutional investors in the Government securities.
Ans: (b)

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