External Sector: FDI, FPI & BoP
Economy Advanced · बाह्य क्षेत्र: FDI, FPI और BoP
📋Quick Overview
India's external sector involves foreign investment (FDI and FPI), external trade, and the management of foreign exchange reserves. The Balance of Payments (BoP) records all economic transactions between India and the rest of the world. India typically runs a Current Account Deficit (CAD) due to high imports. FEMA 1999 governs all foreign exchange transactions in India.
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FDI vs FPI: FDI = ≥10% stake, long-term, strategic; FPI = <10% stake, short-term, 'hot money.' India's forex reserves = ~$650 billion (2024), managed by RBI. Top FDI source to India = Mauritius (treaty shopping).
📖FDI vs FPI — Key Differences
| Feature | FDI (Foreign Direct Investment) | FPI (Foreign Portfolio Investment) |
|---|---|---|
| Stake | 10% or more in a company | Less than 10%; stock market investment |
| Nature | Long-term, strategic, management control | Short-term, market-driven, no management control |
| Volatility | Stable; difficult to exit quickly | Volatile 'hot money'; can exit rapidly |
| Approval Route | Automatic (most sectors) OR Govt (sensitive sectors) | SEBI registration + RBI compliance required |
| Old name | Still called FDI | Earlier called FII (Foreign Institutional Investment) |
| Regulated by | DPIIT (Department for Promotion of Industry) | SEBI (Securities and Exchange Board of India) |
📖Balance of Payments (BoP)
- •BoP = Current Account + Capital Account + Financial Account + Errors & Omissions; total must always balance (with official reserve transactions)
- •Current Account: Trade in goods (visible trade) + Trade in services + Primary income (wages, investment income) + Secondary income (remittances). India's key current account items: oil imports (large debit), software services exports (large credit), remittances (NRI — world's largest recipient)
- •CAD (Current Account Deficit): India's typical situation; imports > exports + services + remittances; worsens when oil prices rise; financed by FDI/FPI inflows
- •Capital Account: Records transfers of capital assets — debt forgiveness, transfer of fixed assets; non-residents' assets; small in India
- •FEMA 1999: Foreign Exchange Management Act; replaced FERA 1973; violations = civil offence (not criminal); RBI administers; key liberalization step
📝FDI Routes & Top Sources
| FDI Route | Sectors | Approval Required |
|---|---|---|
| Automatic Route | Most sectors (up to 100% FDI); e.g., IT, FMCG, retail (single brand) | No prior approval; just notify RBI |
| Government Route | Defence (>74%), media, satellites, banking (>74%) | Prior approval from Ministry of Finance / DPIIT |
| Prohibited sectors | Lottery, gambling, tobacco, chit funds, real estate (some) | FDI not allowed at all |