Distinguish between Foreign Direct Investment and Foreign Portfolio Investment. Critically examine the existing policies adopted by the Government of India for attracting Foreign Direct Investment.

Distinguishing between Foreign Direct Investment and Foreign Portfolio Investment

Both FDI and FPI represent capital inflows from foreign sources, but their characteristics differ significantly.

Feature	Foreign Direct Investment (FDI)	Foreign Portfolio Investment (FPI)
Nature of Investment	Long-term investment establishing a lasting interest or significant influence in an enterprise.	Short-term investment in financial assets like stocks and bonds without intent to control.
Control	Involves managerial control or a significant degree of influence over the operations of the investee company.	No managerial control; purely financial investment.
Risk	Generally lower risk due to long-term commitment and direct involvement.	Higher risk due to market volatility and short-term nature.
Time Horizon	Long-term (typically more than one year).	Short-term (often less than one year).
Impact on Balance of Payments	Creates a lasting asset; less volatile impact.	Can lead to volatile capital flows.
Examples	Setting up a manufacturing plant, acquiring a controlling stake in a company.	Buying shares of a company on the stock exchange, investing in government bonds.

Critically Examining India’s FDI Policies

India’s FDI policy has undergone significant liberalization since 1991, moving from a restrictive regime to a more open and welcoming approach. The government has implemented various measures to attract FDI, which can be categorized as follows:

1. Sectoral Caps and Liberalization

• Initially, FDI was restricted to certain sectors with low caps. Over time, these caps have been progressively relaxed or removed in most sectors.
• Key Sectors & Changes: 100% FDI is now permitted in many sectors like construction, infrastructure, and manufacturing. Significant liberalization has occurred in sectors like defense (up to 49% automatically, beyond that with government approval), multi-brand retail (100% with conditions), and insurance (74% with conditions).
• Recent Changes (2023-24): The government has further eased FDI norms in sectors like space, telecom, and broadcasting.

2. Automatic vs. Government Approval Route

• FDI is generally permitted through two routes: Automatic Route (no prior approval required) and Government Approval Route (requires prior approval from the government).
• The government has consistently expanded the scope of the Automatic Route to reduce bureaucratic hurdles and expedite investment decisions.

3. Incentives and Schemes

• Production Linked Incentive (PLI) Scheme (2020 onwards): This scheme provides financial incentives to companies based on incremental sales of domestically manufactured goods. It covers sectors like electronics, pharmaceuticals, automobiles, and textiles.
• ‘Make in India’ Initiative (2014): Aims to transform India into a global manufacturing hub by attracting investment and fostering innovation.
• National Industrial Corridor Programme: Development of industrial corridors with infrastructure support to attract investment.

4. Policy Reforms & Ease of Doing Business

• Single Window Clearance: Efforts to streamline approvals and reduce bureaucratic delays through online portals and single-window clearance mechanisms.
• Tax Reforms: Reduction in corporate tax rates (from 30% to 22% for existing companies and 17% for new manufacturing companies) to improve the investment climate.
• Bankruptcy and Insolvency Code (IBC), 2016: Strengthened the legal framework for resolving insolvency, enhancing investor confidence.

Critical Assessment

While India’s FDI policies have improved significantly, several challenges remain:

• Inconsistency in Policy: Frequent changes in policies can create uncertainty for investors.
• Land Acquisition Issues: Delays and difficulties in land acquisition remain a major impediment to large-scale projects.
• Infrastructure Deficiencies: Inadequate infrastructure (roads, ports, power) increases the cost of doing business.
• Bureaucratic Hurdles: Despite reforms, bureaucratic delays and red tape persist in some areas.
• Sectoral Restrictions: Some sectors, like retail, still have restrictions that limit FDI inflows.

According to data from the Department for Promotion of Industry and Internal Trade (DPIIT), India received USD 84.835 billion in FDI during the financial year 2022-23. While this is a significant amount, it is still lower than some other emerging economies like China.