External Sector: FDI, FPI & BoP — Set 1

Correct Answer: B. B. Long-term investment where an investor acquires a lasting interest and significant influence in a foreign enterprise

FDI (Foreign Direct Investment) is a long-term investment where a foreign investor acquires a substantial ownership stake (typically 10% or more) in a domestic enterprise, gaining lasting interest and significant management influence. Unlike FPI, FDI involves direct participation in management and operations. FDI contributes to capital formation, technology transfer, employment, and integration into global value chains.

Correct Answer: B. B. Investment in financial assets (stocks, bonds) of a foreign country without significant management control

FPI (Foreign Portfolio Investment) involves investment in financial assets — equity shares, bonds, debentures — of foreign companies without acquiring significant management control (usually below 10% stake). FPI is more liquid than FDI and can move quickly across borders. While FPI brings foreign capital, it is also more volatile and can cause exchange rate and stock market instability if withdrawn suddenly.

Correct Answer: B. B. 10% equity stake in a listed company

In India, under SEBI and RBI guidelines, an investment of 10% or more in a listed Indian company is classified as FDI (Foreign Direct Investment), while investment below 10% is classified as FPI (Foreign Portfolio Investment). This threshold aligns with OECD's international standard definition of FDI. Investments above 10% are treated differently for regulatory, reporting, and sectoral cap purposes.

Correct Answer: C. C. Department for Promotion of Industry and Internal Trade (DPIIT)

The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry is the apex body for FDI policy in India. It issues the Consolidated FDI Policy and coordinates with RBI (which handles compliance under FEMA), SEBI (which regulates FPI), and sectoral regulators. DPIIT decides which sectors are open to FDI, sets sectoral caps, and determines entry routes.

Correct Answer: B. B. Automatic route and Government (approval) route

FDI in India enters through two routes: (1) Automatic Route — no prior approval required from the government or RBI, FDI is permitted up to the sectoral cap; (2) Government (Approval) Route — prior approval from the relevant ministry/department and FIPB (now replaced by sectoral ministries) is required. Most sectors are now under the automatic route; sensitive sectors (defence above 74%, media, etc.) require government approval.

Correct Answer: C. C. 2017

The Foreign Investment Promotion Board (FIPB), which used to approve FDI proposals requiring government approval, was abolished in May 2017. After its abolition, FDI proposals requiring government approval are processed by the concerned administrative ministry/department. This was done to simplify the FDI approval process, promote ease of doing business, and reduce approval times. DPIIT retains the policy coordination role.

Correct Answer: C. C. SEBI

SEBI (Securities and Exchange Board of India) is the primary regulator for Foreign Portfolio Investment (FPI) in India. FPIs must register with SEBI through designated depository participants (DDPs). SEBI's FPI Regulations 2019 govern the registration, eligibility, investment limits, and compliance requirements for foreign investors. RBI issues the underlying guidelines under FEMA for the cross-border transfer of funds.

Correct Answer: B. B. All economic transactions between residents of one country and rest of the world over a period

Balance of Payments (BoP) is a systematic record of all economic transactions — goods, services, income, and financial flows — between residents of a country and the rest of the world over a specific period (usually a year or quarter). BoP consists of three accounts: Current Account (trade in goods and services), Capital Account (capital transfers), and Financial Account (FDI, FPI, other investments). In principle, the BoP always balances.

Correct Answer: B. B. Trade in goods, trade in services, primary income, and secondary income (remittances)

The Current Account records: (1) Merchandise Trade (goods exports minus imports — trade balance); (2) Services Trade (software exports, tourism, financial services — India's strength); (3) Primary Income (dividends, interest — usually deficit for India); (4) Secondary Income (remittances from NRIs abroad — India is world's top remittance recipient). The sum of these four is the Current Account Balance.

Correct Answer: B. B. Total imports (goods + services + income + transfers) exceed total exports

Current Account Deficit (CAD) occurs when a country's total payments to the rest of the world (imports of goods, services, income paid, transfers sent) exceed its total receipts (exports of goods, services, income received, transfers received). India typically has a CAD because imports of goods (especially oil and gold) exceed exports. CAD needs to be financed by capital/financial account surpluses (FDI, FPI, loans).