Model Answer
0 min readIntroduction
Globalization has led to increased capital flows across borders, with Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) being two prominent forms. Both contribute to economic growth, but differ significantly in their nature and impact. India, in particular, has actively sought to attract foreign investment to fuel its economic development and address its capital needs. As of November 2023, India received USD 91.91 billion in FDI, showcasing its growing attractiveness as an investment destination (DPIIT Report, Nov 2023). This answer will delineate the differences between FDI and FPI and critically examine the policies adopted by the Government of India to attract FDI.
Distinguishing between Foreign Direct Investment and Foreign Portfolio Investment
FDI and FPI represent distinct approaches to international investment. The core difference lies in the level of control and long-term commitment.
| Feature | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
|---|---|---|
| Control | Significant control and management participation in the investee company. | No control; passive investment in financial assets. |
| Investment Horizon | Long-term; aimed at establishing a lasting interest. | Short to medium-term; driven by market fluctuations. |
| Risk | Lower risk due to direct involvement and long-term perspective. | Higher risk due to market volatility and lack of control. |
| Nature of Investment | Investment in physical assets, establishing businesses, or acquiring existing ones. | Investment in financial assets like stocks, bonds, and other securities. |
| Impact on Balance of Payments | More stable and long-lasting impact. | More volatile impact. |
Government of India’s Policies for Attracting FDI: A Critical Examination
The Indian government has undertaken several policy initiatives to attract FDI, evolving over time from a cautious approach to a more liberalized regime. These policies can be categorized into several phases:
Early Reforms (1991-2000)
- Liberalization and Deregulation: The 1991 economic reforms marked a turning point, opening up several sectors to FDI.
- Sectoral Caps: Initial FDI limits were imposed on various sectors, with a focus on attracting investment in priority areas like infrastructure.
Consolidation and Expansion (2000-2014)
- Automatic Route vs. Approval Route: FDI was categorized under the automatic route (no prior approval required) and the approval route (government approval needed).
- Sectoral Reforms: FDI caps were gradually increased in sectors like telecom, insurance, and retail.
- National Manufacturing Policy (2011): Aimed to boost manufacturing sector FDI.
Recent Policies (2014-Present)
- Ease of Doing Business: Initiatives like ‘Make in India’ (2014) and improvements in the World Bank’s Ease of Doing Business ranking aimed to create a more investor-friendly environment.
- Liberalization of FDI Norms: Significant liberalization in sectors like defense, multi-brand retail, and civil aviation. Removal of restrictions on FDI in several sectors under the automatic route.
- Production Linked Incentive (PLI) Scheme (2020): Offers financial incentives to boost domestic manufacturing and attract FDI in key sectors.
- 100% FDI under Automatic Route in several sectors: Including activities like insurance, asset and wealth management, and medical devices.
- Changes in FDI policy related to Telecom Sector (2021): Allowing 100% FDI through automatic route in Telecom sector.
Critical Assessment
While India’s FDI policies have evolved positively, several challenges remain:
- Policy Consistency: Frequent changes in policies can create uncertainty for investors.
- Bureaucratic Hurdles: Despite improvements, bureaucratic delays and complex regulations still pose challenges.
- Land Acquisition: Difficulties in land acquisition remain a major impediment to large-scale FDI projects.
- Infrastructure Deficiencies: Inadequate infrastructure, including transportation and power supply, can deter investment.
- Retrospective Taxation: Past instances of retrospective taxation have eroded investor confidence (though largely addressed now).
Despite these challenges, the PLI scheme has shown promising results, attracting significant investment in sectors like electronics and pharmaceuticals. The focus on ease of doing business has also improved India’s attractiveness as an investment destination. However, sustained efforts are needed to address the remaining challenges and ensure a stable and predictable investment climate.
Conclusion
In conclusion, FDI and FPI are distinct investment forms with varying implications for economic growth. India has made significant strides in attracting FDI through progressive policy reforms, particularly in recent years. While the government’s initiatives like ‘Make in India’ and the PLI scheme have yielded positive results, addressing persistent challenges related to policy consistency, bureaucratic efficiency, and infrastructure development is crucial for sustaining the momentum and maximizing the benefits of foreign investment. A long-term, stable, and predictable policy framework will be key to attracting high-quality FDI and fostering inclusive economic growth.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.