Syllabus: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
Context: Net FDI into India fell 159% in August 2025, with more money leaving than entering. This is the second time this financial year that outflows exceeded inflows (first was May 2025 at -$5 million).
Foreign Direct Investment (FDI)
- Investment by foreign company/individual in business interests of another country.
- Involves acquiring significant stake or establishing new operations (subsidiaries, joint ventures, branches).
- Types of FDI
- Horizontal FDI: Establishing same type of business operation abroad as in home country (e.g., U.S. fast-food chain opening new outlets in foreign country).
- Vertical FDI: Acquiring complementary business in foreign country (e.g., German car manufacturer investing in foreign specialized parts producer).
- Conglomerate FDI: Investing in unrelated foreign business, often via joint venture (e.g., U.S. technology firm investing in foreign fashion brand).
- FDI Methods
- Greenfield Investment: Establishing new operation from scratch (new plants, offices, manufacturing facilities); full investor control.Â
- Brownfield Investment: Acquiring/merging with existing foreign company; uses existing infrastructure.
- Factors Influencing FDI
- Large market size and growth potential.
- Political stability.
- Investor-friendly legal/regulatory framework (property rights, tax incentives, transparent governance).
- High-quality infrastructure (transport, telecom, energy).
- Skilled workforce, affordable labour costs.
- Ease of doing business (streamlined processes, permits, profit repatriation).
- Significance of FDI
- Economic growth: Capital inflow, job creation, technological advancement.
- Infrastructure development: Transport, energy facilities.
- Technology transfer: Advanced technologies, management practices improve productivity.
- Increased exports: Enhanced production for global markets.
- Job creation: Lower unemployment, higher living standards.
- Tax revenue: Corporate tax from FDI profits.
- Criticisms of FDI
- Market domination: Large foreign firms push out SMEs, stifle competition/innovation.
- Profit repatriation: Profits return to investor’s home country, limiting host benefits.
- Resource exploitation: Exploitation of local labour, resources, markets.
- Regional imbalance: FDI flows to developed states (Maharashtra, Gujarat), widens regional disparities.
- Environmental degradation: Mining, manufacturing projects harm sustainability.
- Cultural erosion: Multinational uniformity threatens local cultures/practices.
FDI in India
- FDI means investment through capital instruments by person resident outside India in:
- Unlisted Indian company, OR
- 10%+ post-issue paid-up equity capital of listed Indian company.
- Governed by Foreign Exchange Management Act (FEMA) and administered by RBI.
- Consolidated FDI Policy: Issued by DPIIT (Ministry of Commerce).
- Key Data
- FDI Inflows
- FDI rose from USD 36.05 billion (FY 2013-14) to USD 81.04 billion (FY 2024-25)
- Last 11 years (2014-25): USD 748.78 billion — 143% increase over previous 11 years (2003-14: USD 308.38 billion).
- Top Sectors (FY 2024-25)
- Services (19%)
- Computer Software/Hardware (16%)
- Trading (8%)
- Manufacturing: USD 19.04 billion (up 18% from USD 16.12 billion in FY 2023-24).
- Top Source Countries (FY 2024-25)
- Singapore (30%), Mauritius (17%), USA (11%).
- Top States (FY 2024-25)
- Maharashtra (39%), Karnataka (13%), Delhi (12%).
- FDI Inflows
FDI vs FPI
| Aspect | FDI | FPI |
| Nature | Long-term, hands-on business investment | Short-term, passive financial assets (stocks, bonds) |
| Control | Significant control over operations | No operational influence |
| Risk/Return | Higher risk, long-term returns | Lower risk, short-term gains |
Q- “FDI is a double-edged sword – while it brings capital and technology, it also poses risks of market domination and profit repatriation.” Critically evaluate this statement in the Indian context. (15 Marks)
