Foreign Direct Investment (FDI) & Foreign Portfolio Investment (FPI) – Trends & Policies
🟠 Topic 68: Foreign Direct Investment (FDI) & Foreign Portfolio Investment (FPI) – Trends & Policies
📌 Introduction
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two key sources of external capital inflows into India. These investments play a crucial role in augmenting domestic capital, creating employment, transferring technology, and integrating India with global financial markets. India’s liberal FDI policy and evolving regulatory framework for FPI aim to balance capital inflows with economic stability.
🔹 What is Foreign Direct Investment (FDI)?
📖 Definition
FDI refers to long-term investment by a foreign entity in an Indian business, typically involving control, ownership, or significant influence over management decisions.
Key Features
✔️ Long-term in nature.
✔️ Investor has management control or influence.
✔️ Brings capital, technology, and expertise.
✔️ Typically involves greenfield projects, mergers, acquisitions, and joint ventures.
🔹 What is Foreign Portfolio Investment (FPI)?
📖 Definition
FPI refers to investment by foreign entities in Indian financial assets, such as equity shares, bonds, and mutual funds, without any significant control or management influence.
Key Features
✔️ Short-term, speculative capital.
✔️ Easily reversible (hot money).
✔️ Primarily for financial returns.
✔️ No direct management involvement.
🔹 Key Differences Between FDI & FPI
| Parameter | FDI | FPI |
|---|---|---|
| Nature | Long-term | Short-term |
| Control | Significant control | No management control |
| Investment type | Direct business investment | Stocks, bonds |
| Stability | Relatively stable | Volatile |
| Examples | Amazon’s investment in India | FIIs investing in Sensex stocks |
🔹 Importance of FDI & FPI in India
| Aspect | Contribution |
|---|---|
| Capital Formation | Supplements domestic savings |
| Technology Transfer | Brings advanced technology & know-how |
| Employment Generation | Creates jobs in manufacturing & services |
| Forex Reserves | Enhances forex reserves |
| Stock Market Depth | FPI deepens capital markets |
🔹 Trends in FDI Inflows into India (2023)
| Parameter | Value |
|---|---|
| Total FDI Inflows (2022-23) | ~$71 billion |
| Top Sectors | Computer software & hardware, services, telecom |
| Top Sources | Singapore, USA, Mauritius, UAE |
Sector-wise FDI Inflows (2022-23)
| Sector | Share (%) |
|---|---|
| Computer Software & Hardware | 25% |
| Services | 15% |
| Telecom | 8% |
| Trading | 7% |
| Construction (infra) | 6% |
State-wise FDI Distribution
| State | Share (%) |
|---|---|
| Maharashtra | 28% |
| Karnataka | 24% |
| Delhi NCR | 17% |
| Gujarat | 6% |
🔹 Key FDI Policies & Routes
1️⃣ Automatic Route
- No prior government approval required.
- Applies to most sectors like manufacturing, IT, services.
2️⃣ Government Route
- Requires approval from Ministry of Commerce/concerned ministries.
- Applies to sensitive sectors like defence, telecom, media.
3️⃣ Sectoral Caps
| Sector | FDI Limit |
|---|---|
| Telecom | 100% (automatic) |
| Insurance | 74% (automatic) |
| Defence | 74% (automatic), 100% (govt route for niche tech) |
| E-commerce (marketplace) | 100% (automatic) |
| Banking (Private Sector) | 74% (automatic) |
Recent Reforms in FDI Policy
✔️ 100% FDI allowed in single-brand retail (SBRT).
✔️ Increased insurance sector FDI cap to 74%.
✔️ Allowed FDI in space sector, with conditions.
✔️ Restriction on FDI from bordering countries (China) — subject to government approval.
🔹 Trends in FPI Inflows into India
| Parameter | Value (2022-23) |
|---|---|
| Total FPI Inflows | ₹1.25 lakh crore |
| Top Sectors for FPI | Financial services, IT, healthcare, energy |
| Major Source Countries | USA, Singapore, UK, Canada |
Role of FPI in Indian Markets
✔️ Adds depth and liquidity to equity and bond markets.
✔️ Improves global confidence in India’s financial markets.
✔️ Acts as a market sentiment indicator — large FPI outflows can trigger stock market corrections.
Risks Posed by FPI
❌ Highly volatile, driven by global sentiment and liquidity.
❌ Sudden outflows (capital flight) can destabilise rupee and markets.
❌ External factors like US Fed rate hikes impact FPI flows to emerging markets.
🔹 Policy Framework for FPI
1️⃣ Foreign Portfolio Investors (FPI) Regulations, 2019
- Registration of FPIs with SEBI.
- Categorisation into Category I and II based on risk and origin.
- Investment caps in government bonds, corporate bonds, and equity.
2️⃣ FPI Limits in Debt Market
- Limits prescribed for: ✔️ G-Secs (15% of outstanding stock).
✔️ Corporate Bonds (15% of outstanding stock).
3️⃣ Voluntary Retention Route (VRR)
- Introduced in 2019.
- Offers relaxations on investment norms if FPIs commit to retain a portion of their investment for a minimum period (3 years).
🔹 FDI vs FPI – Comparative Table
| Parameter | FDI | FPI |
|---|---|---|
| Investment Horizon | Long-term | Short-term |
| Control & Management | Yes | No |
| Stability | Stable | Volatile |
| Economic Impact | Directly impacts industry | Indirectly impacts financial markets |
| Policy Approach | Liberalised progressively | Regulated for stability |
🔹 Case Study – FDI in E-commerce
- India allows 100% FDI in marketplace e-commerce (Amazon, Flipkart) but restricts inventory-based models.
- Conditions: ✔️ No single vendor to contribute more than 25% of total sales.
✔️ Marketplace platforms cannot offer discounts directly. - Protects domestic retailers, while attracting foreign capital.
🔹 Case Study – FPI Flight During COVID-19
- March 2020: FPI outflows exceeded ₹1 lakh crore.
- Reasons: ✔️ Global risk aversion. ✔️ Concerns over India’s economic contraction. ✔️ Search for safety in US Treasury Bonds.
- RBI used forex reserves to stabilise rupee volatility.
📚 Practice MCQ
1️⃣ Which of the following is a feature of Foreign Direct Investment (FDI)?
- Short-term speculative flows.
- Significant management control.
- Easily reversible investments.
✅ Options:
(a) 1 only
(b) 2 only
(c) 2 and 3 only
(d) 1, 2, and 3
2️⃣ Under India’s FDI policy, which sector has the highest automatic route cap?
✅ Options:
(a) Insurance
(b) Defence
(c) Telecom
(d) Banking
3️⃣ Which regulatory body oversees FPI investments in India?
✅ Options:
(a) RBI
(b) SEBI
(c) Ministry of Finance
(d) NITI Aayog
