UPSC Prelims 2020 Q51: Indian Economy – External Sector & Balance Of Payments
- (a) It is the investment through capital instruments essentially in a listed company.
- (b) It is a largely non - debt creating capital flow.
- (c) It is the investment which involves debt - servicing.
- (d) It is the investment made by foreign institutional investors in the Government securities.
Answer: (b) It is a largely non - debt creating capital flow.
Explanation
FDI Major Characteristic: Non-Debt Creating
| Characteristic | Is it FDI's defining trait? |
|---|---|
| Capital instruments in listed companies | Partial - FDI is equity, not just listed |
| Largely non-debt creating | YES |
| Involves debt-servicing | NO - opposite |
| FII investments in govt securities | NO - FPI, not FDI |
FDI (Foreign Direct Investment): Foreign investor acquires equity stake (10%+) in foreign company, giving managerial control + lasting interest. Key feature:
- Equity-based (shares, not bonds)
- Non-debt creating (doesn't require debt repayment)
- Creates lasting stake + control
- Can be reinvested earnings
Contrast FPI (Foreign Portfolio Investment) which is debt/equity holding <10%, debt-based, no control.
Answer: (b) It is a largely non-debt creating capital flow.
Why each option is right or wrong
- (a) Incorrect. FDI goes beyond listed companies; unlisted companies + greenfield included.
- (b) CORRECT. FDI's major characteristic is being non-debt creating (equity-based) capital flow.
- (c) Incorrect. Debt instruments create servicing obligations; FDI equity doesn't.
- (d) Incorrect. Govt securities are FPI category, not FDI.
Key point
FDI = equity capital flow, non-debt creating. Gives investor control (usually 10%+), creates lasting interest, can be reinvested. Contrast: FPI = portfolio investment, debt-based, <10% usually, no control.
Remember
The major characteristic of Foreign Direct Investment in India is that it is a LARGELY NON-DEBT CREATING CAPITAL FLOW - FDI is primarily equity-based and creates lasting managerial interest and control, unlike debt flows which require repayment and servicing.
Common mistakes
- Confusing FDI (equity, control) with external debt (bonds, servicing). Very different capital flows.
- Assuming FDI is always in listed companies. Unlisted companies, greenfield projects also count.
- Missing that FDI includes reinvested earnings - if foreign company's subsidiary profits stay in country, that's FDI.
Exam tip
India's FDI in 2020: ~$64B. Major sources: Singapore, US, Mauritius, Netherlands. Major sectors: IT, telecom, finance. FDI > FPI in stability (long-term vs hot money).
Sources
- DPIIT - Consolidated FDI Policy
- RBI - Balance of Payments Manual