Foreign Direct Investment (FDI) & Foreign Portfolio Investment (FPI)

Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are key sources of foreign capital in India, playing distinct roles in economic growth. This chapter explores their differences, features, significance, and impact, tailored for UPSC Prelims preparation.

Foreign Direct Investment (FDI)

FDI involves long-term investments by foreign entities in Indian businesses, typically with significant control or ownership (10% or more equity stake).

Features

Significance

Example: Walmart’s $16 billion acquisition of a 77% stake in Flipkart (2018) is a major FDI, boosting India’s e-commerce sector.

Foreign Portfolio Investment (FPI)

FPI involves short-term investments in financial assets like stocks and bonds, typically without control over management (less than 10% equity stake).

Features

Significance

Example: FPI investments in Reliance Industries’ stocks surged in 2024, boosting BSE Sensex but causing volatility during global market corrections.

Differences Between FDI and FPI

Aspect FDI FPI
Nature Long-term, physical investment Short-term, financial investment
Control Significant (≥10% stake) No control (<10% stake)
Investment Type Factories, infrastructure Stocks, bonds
Regulation DPIIT, RBI (FEMA, 1999) SEBI, RBI (FEMA, 1999)
Impact Jobs, technology transfer Market liquidity, volatility
Example: FDI in Tesla’s planned Gigafactory in India (2024) creates jobs, while FPI outflows during the 2023 global recession weakened the rupee.

Benefits and Challenges

Benefits

Challenges

Example: FDI in defense is capped at 74% to protect national security, while FPI sell-offs in 2023 caused a 5% dip in Sensex.

Key Concepts for Prelims

Understanding related terms is crucial for UPSC Prelims.

Key Points for Prelims

  • FDI inflows in 2023-24 were $44.8 billion, highest in manufacturing and IT.
  • FPI is regulated by SEBI; FDI by DPIIT and RBI.
  • 100% FDI allowed in single-brand retail, but multi-brand retail capped at 51%.
  • FPI outflows can destabilize markets, as seen in 2022-23 global crises.
  • Make in India (2014) boosted FDI in manufacturing and electronics.

Summary of FDI & FPI

Aspect FDI FPI
Investment Type Physical assets, equity ≥10% Financial assets, equity <10%
Examples Flipkart acquisition Nifty 50 stocks
Impact Jobs, technology Market liquidity
Regulation DPIIT, RBI SEBI, RBI
Stability Stable, long-term Volatile, short-term

Frequently Asked Questions (FAQs)

Q1: How does FDI differ from FPI in terms of economic impact?

Ans: FDI creates jobs and infrastructure (e.g., factories), while FPI boosts market liquidity but can cause volatility (e.g., stock market fluctuations).

Q2: Why does India restrict FDI in certain sectors?

Ans: Restrictions in sectors like defense and retail protect national security and local businesses, balancing foreign investment with domestic interests.

Q3: How do FPI outflows affect the Indian economy?

Ans: FPI outflows reduce stock market indices and weaken the rupee, as seen in 2022 when $5 billion exited due to global rate hikes.

Practice Questions

  1. Explain the key differences between FDI and FPI with examples from the Indian economy.
  2. Discuss the role of FDI in India’s economic growth, citing specific sectors.
  3. How do FPI inflows and outflows impact India’s capital markets?

Additional Resources