Question 21 from UPSC CSE 2020 - ECONOMICS

Question

With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

IASCODEX · Accepted Answer

Correct Option: B. It is a largely non-debt creating capital flow.

Strategy: *   Focus on FDI's defining characteristic: "non-debt creating capital flow."
*   Eliminate options that confuse FDI with debt or portfolio investments (e.g., FIIs in government securities, investments requiring debt-servicing).
*   Discard options incorrectly limiting FDI to listed companies.
*   Validate the option that aligns with FDI's non-debt creating nature.

Key Info: ## Foreign Direct Investment (FDI)
FDI involves investment by a non-resident entity or individual into the capital of an Indian enterprise. It operates under regulations notified by the RBI and is governed by the Foreign Exchange Management Act (FEMA), 1999.

### Key Characteristics:
*   **Acquisition of Substantial Stake** -- Typically 10% or more, conferring significant influence or control to the foreign investor in unlisted or threshold-meeting listed companies.
*   **Transfer of Expertise** -- Often accompanied by managerial expertise and technology transfer, contributing to long-term productive capacity.

### Non-Debt Creating Capital Flow:
FDI is classified this way because it does not create any repayment obligation for the Indian entity. The inflow is equity capital, not a loan, so there's no direct liability for principal or interest repayments (debt servicing).

In contrast:
*   **Portfolio Investments** -- Such as those by Foreign Institutional Investors (FIIs) in government securities and listed equities, are not classified as FDI.
*   **Debt Servicing** -- Applies to loans like External Commercial Borrowings (ECBs), not FDI.

### Regulation and Impact in India:
FDI in India is regulated under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Sectoral caps and entry routes are notified by the Government of India and administered by the RBI. FDI serves as a crucial source for technology, employment, managerial practice transfer, and capital formation for the Indian economy.

IASCODEX · Answer

Option A: It is the investment through capital instruments essentially in a listed company.

IASCODEX · Answer

Option C: It is the investment which involves debt-servicing.

IASCODEX · Answer

Option D: It is the investment made by foreign institutional investors in the Government Securities.