FDI INFLOW

Subject: Economics

Context: During April-September 2020, India attracted FDI worth $7.12 billion from the U.S. and $2 billion from Mauritius, which slipped to fourth position, the DPIIT (Department for Promotion of Industry and Internal Trade) data showed.

Concept:

Key Takeaways:

• The U.S. has emerged as the second biggest source of foreign direct investment (FDI) into India, replacing Mauritius, during the first half of the current financial year, according to data of the Commerce and Industry Ministry.
• Mauritius was the second biggest FDI source during the same period previous year. The U.S. was the fourth biggest investor during that period.
• Singapore with $8.30 billion foreign inflows continued to be the top source of FDI for India in April-September 2020-21. The country has received $2.1 billion inflows from Cayman Isands.
• The islands was followed by Netherlands ($1.5 billion), U.K. ($1.35 billion), France ($1.13 billion), Japan ($653 million) , Germany ($202 million), and Cyprus ($48 million).

Foreign Direct Investment

• FDI is the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).
• It is different from Foreign Portfolio Investment where the foreign entity merely buys stocks and bonds of a company. FPI does not provide the investor with control over the business.
• Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an enterprise.
• FDI has three components, viz., equity capital, reinvested earnings and intra-company loans.
• Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.
• Reinvested earnings comprise the direct investors’ share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
• Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (or enterprises) and affiliate enterprises.

Routes through which India gets FDI:

• Automatic Route: In this, the foreign entity does not require the prior approval of the government or the RBI.
• Government route: In this, the foreign entity has to take the approval of the government.
• The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications which are through approval route.